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11 ISM=r and Auhots Ibis report is based on previous economic and sector work and the finding of two misso which visited Zambia in August and October, Both missions were led by John E. Todd (AF6CO, task mager) and included Changpo Yang ar.i Yvonne Tsi1at (AF6CO). Te second mission al Included Vargha Azad (AFCO), Jan Hendrlk van Leeuwen (contant), Elah Chembe (Resident Mission), Steen Jorgensen and Bert Hofman (AFiPH), and Christna Hartler (desk officer, Swedish International Development Authority). In addtdon, The agriculturo section was writton by Barnabas Zegge (AF6AG), the land section by lain Shubker (AF6AG), and the ficw syem by Simon Bell (AF61E). The report was prepared in consulttdion with a government working group convened for this purpose and chaired by Leonard Nkbata from the National Cmmission for Development Planning. An eadier draft co. to social sector sections was discussed with a group of NGOs and academics under the auspi-.es of UNICEF. ITe mission also spent considerable time with representatives of the private sector, including interviews with over 30 businesses. Assembling the data base and making the economic projections was the responsibility of Vargha Azad (AF6CO). William Easterly (CECMG) served as project advisor. Valuable comments on earlier drafts were received from Gene Tidrick (AI6DR) and Ataman Aksoy (AF6CO). Vince McCullough edieed the final report. Typing and editing was by Ligia Murphy, Georgette Jobnson and Maysue K. Shore (AP6CO).

12 1. The purpose of this Country Economic Memodum (CEM) is to assess the potent for and requremet of longer-term, s le economic growth in Zambia, particularly as t reates to improving the living standards of the most disadvantaged. 2. The first r'at looks at economic developments in the nearly thirty years since Zabia's dependence, with pardcular emphasis on economic growth, investment, and the balance of payments. It also examines the distribution of Income and profiles poverty In Zambia. 'Me second part reviews the policy issues raised in the first section and sets out the policy agenda for the 1990s. A number of economic projections are shown based on different assumptions about export growth, improved effciency of input use, and the amount and efficiency of Investment. Finally, some longer-term policy issues are addressed in the context of tase projections. 3. TIhs report buids on the analysis of two previous CEMs (1984 and 1986), three recent PFPs (1989, 1991, and 1992), the analysis done in preparation for the two recent adjustment credits, and numerousector reports including a Public Expenditure Review, sector reports on agriculre, transport, energy, and education, and papers on public sector management and debt stmegy. 4. The central issue addressed by this report is whether per capita economic growth is possible in Zambia. There are ample reasons to be pessimistic. Zambia faces daunting obscles. First, the copper sector will continue to require about $150 milion per year (about 4 percent of GDP) in recurring rehabilitation costs In addition to operating inputs just to mainain copper production from existing mines over the decade. Some $500 to 600 million wil be needed over the period (primarily from foreign investors) to exploit new copper resourc to offset the likely closing of the largest copper mine shortly after the year 2000 This substi investment wiul be needed just to keep copper production roughly where iti now. Second, the very large xtenal debt means fat ven with generous resheduing and etna assistance and strong growth in non-traditional exprts, Zambia will only be able to afobrd modest growth in imports over the next decade which may constrain the rate of real GDP growth. Third, Zambia begins the process with a deteriorated inrastructure, a poorly developed endowment of human capital, and an overly large and inefficient public sector. None of ihese problems can be fixed quicldy, and all of them will require more Inestme. Add a legacy of over-regulation, a land-locked position, and uncertain regional relatonships, and the reasons for caution in assessing Zambia's growth prospects are clear. S. There are, however, a mmber of reasons for opdmism. Fist, economic efficiency has been so bad that there is considerable scope for economic growth through increased efficiency, even without massive new investment. Second, Zambia does have ample arable land and numerous naual resources (e.g. metals and gemstones). Agricutural growth rates of 7 to 10 percent per year should be possible with the right land policy and price incentives. Thi, Zambia's government is detemined to put economic policies right, to promote the privae sector, to increase public sector efficiency, and to open up export markets. Their commitment to these policies appears strong and genuine. Public support for this approach was evident in the landdide electoral victory of the new government in October 1991 and was confimed in the more recent and equally strong victory in local elections in November 1992.

13 -i- For these reasons, this rept finds that modest levels of economic growth should be possible, povided there Is contiued policy improvement and generous and creative external support. 6. Te time frame of this report i somewhat longer than t lost recent work on Zambia. be fous In recent yes, pariualy by the World Bank, has been on the clearance of ars (twice) and the genea resumpon of an internationally supported reform program. With tht estiblished, it Is Impota to take a longer perspective. While growth In the short term depends heavily on such factors as copper prices, weather, and external aid flows, longer-tem sustnable growth depends more on export growth and the quantity and quality of Investment becase unless these increase, any short-term increases in growth will not be sstained. A longer perspective also emphasizes the crucial importance of some policy areas (e.g. primay education and family planning) whose Impact on economic growth may be significant only in the longer-term. 7. This report puts the living standards of average Zambians at center stage. Economic growth is not important in itsef. Growth is a means to an end, and the end being sought is the Improvement in the standard of living of all Zambians, in partcular those living at or near sbsistence. To keep thes objectives in mind, all observers of the Zambian scene should be encouraged to monitor the actual living standards and well-being of Individuals, rather than relying only on national economic statistics of questionable quality. We should try to n easure the quality of public services, not just the amount spent on them. We should look at the utrltion&. quality of people's diets and not just at per capita GDP. The performance of a Bank project should be measured by Its impact on the beneficiaries and not on the smoothness Of disb. We should also be asking how the fruits of this development are being shared. A cetain umnvenness is inevitable in any growth process, but if large sections of the most vulnerable do not participate at all (or even suffer losses in real income), then the ultimate objective of widesread improvement in living standards will have been missed. 8. The audience of this report is expected to be the Governmt and private sector of Zambia, donors, and the Bank For the authorities, is hoped that this report will help them to sort out policy priorities and to set their current policy efforts into a longer term strategic context. For the donors, the report is intended to give a longer-term vision of the exter support Zambia will require, in combination with these internal improvements in economic policy, in order to make economic growth possible. Within the Bank, the intention is to provide a longer-term policy perspective and a sense of economic priorities to assist in the development of the Bank work program in Zambia.

14 -1- SammWa~nd C2Sbgu 1. The standard of living of most Zamrbans has deteriorated sharply since its peak In the early 1970s. The immediate cause was a drop in copper prices (and an increase in world oji prices) that reduced Zambia's capacity to import, but the failure of the economy to recover from those shocks has been due primarily to the excessive publicsector role In the economy, with its attendant Inefficiencies and rigidwes. Modest reform efforts In the 1980s began to turn the econmy around. The new governmen, elected in October 1991, has strengthened the focus of (and commimen to) an ambitious economic reform program that could achieve susainable and equitable growth, provided govemnt continues its policies of market liberalization and public sector Improvement, and provided the international cmmunity provides sustained and generous support. Histoi and 8alloud 2. Before Independence in 1964, Zmbia's formal economy was dominaed by the copper sector and heavily controlled by non-zambians. All but those few Zambians with jobs in the mines or with government were outside the formal economy, predomi In subslsasce agriutr. The government was committed to using copper revenues to improve public srvices and to bring mare Zambians into the formal sector. Although policies toward the privat sector were relatively liberal and benign at the outset, a growth strateg based on parastatals became increasingly dominant. By the early 1970s, Zambia had become a classic case of a public sector-led economy with excessive controls, parastatal monopolies, and a prourban, anti-agricultural bias derived in part from a distust of the private sector based on the colonial experience. 3. The result was that, in the first ten years of Independence - when copper prices were Increasing, investment was high, and nearly all exter signs were positive - Zambi's economy grew by only 2.4 percent, well below the rate of population growth. Some impressive gains were made in providing public services, but the groundwork was not id for sustainable growth, and the limited flexibility inherent in a public sector-led economy (especialy with low public sector management capacity) was to prove Zambia's undoing in the decade that followed. 4. The severe detearioron in Zambia's terms of trade in the latter half of the 1970s (together with the reduction in copper output) severely restricted the avalability of foreign exchange and reduced economic growth. Necesary adjusme were not made. Expecting good dmes to reur, the reaction was to borrow heavily, to increase the share of income going to consumption, to resist exchange-rate depreciation, and to increase distortions caused by direct controls and parastatal dominance. A private sector-led economy might have been forced to make rapid and large adjustmes. Unftnaly, Zambia's economy could not (and did not) adjust, and the resut was one of the world's worst economic growth performances over the past 17 years. 5. Ihe big effect of the terms of trade shock was the strikng fail in national income, more than 30 percent in 1975 alone. (See Chapter 1.) Experience of other countries suggests that Zambia's terms of trade deterioration in the mid-1970s would account for a drop of about one percent a year in output growth. In fact, average anmnal GDP growth feu from 2.4 percent in the first decade after Independence (already a disappointment given the high level

15 -2- of expots and Investment) to 0.7 perceat a year in the next 1S years. This larger fal sem to have been due to the Inherent inflexibility In an economy dominatd by the public sector, and to the refusal of the govenmet to me the necesary adjustms. Moreover, the epeience of other counties sugget tt policy deficiencies In Zambia would account for a shortfall of more than 2 pecent a year throughouthe endre period. ITerefore, in explining Zambia's dramatic drop in nationra incme, deteriorating terms of trade are the main culprit. But it Is natonal g j that determines the long-term well-being of nations, and here the main problem has been poor policy. In terms of national gojj, the main question is not why there was a drop In GDP growth after the mid-1970s but why GDP growth was so low throughout the period. With proper economic policies, GDP growth could have been S percent in the first decade ae Independence and 4 percent In the more difficult decade that followed. Supporting that point, output growth did Improve modesly in the late 1980s, despite a declining rate of investmwnt, because of some pari but important policy liberalizations and improveme in the availability of foreign exchange. 6. The blac of pa has been a major deteminant of t>e level and pattem of economic growth In Zambia. Zambia is heavily dependent on copper export earings. Nonmetal exports have been limited by an overvued exchange rate and by policies that discouraged production of export products where Zambia appears to have a comparative advantage, pardtularly in the agdcultural sector. (See Chapter 2.) The fall In copper proceeds has been due to declines in both production and price. The world copper price divided by the average cost of traded manufactured goods declined by 63 percent from 1970 to Zambia's economy was highly dependent on Imports for consumer goods as well as Intemediate and capital goods during the copper boom. This dependency restricted growth Prospects as import capacity decreased. Most Import reduction was in consumer goods, but Imports of intemeda and capital goods also declined. Zambia's import dependence (measured by the import/gdp ratio) is now below the average for Sub-Saharan Africa. 8. Zambia debt Is one of the highest relative t ntional output and exports. Substantil borrowing was done in the late 1970s and early 1980s to offset lower copper ekports. Unfortunaely, the loss In exports was so large that even Zambia's huge borrowings (over $500 million a year in ) was not enough to msainain real imports. Moreover, much of the borrowing went for consumption (or, more excly, it permitted consumption to be higher than it otherwise would have been) and so did not contribute to economic growth or to debt-svicing capacity. Inability to adequately service the debt caused the debt stock to continue to increase in the 1980s, even after most borrowing had ceased. Although generous reschedwing and increashigly soft terms should keep the debt service/export ratio to just over 30 percent over the next five years, the large debt stock will have to be addressed more directly If Zambia is ever to achieve sustinable and self-sufficient growth. 9. The consequences of eral shocks and poor economic performance have been felt by all Zamblans and by al parts of the economy. Formal sector real wages have fauen to less than half of their peak levels. There has been greater equality In wage distrbution in the formal sector but only because higher wages have fallen more rapidly than lower wages. Ionnal sedor eaings have also fallen sharply. Povery over time is not easily measured in Zambia due to the poor quality of the data, but it appeas that both the extent and severity of poverty have been incrang, at least over the past decade. This is confirmed in related social niators, such as those on malnutrition and infant mortality. The quantity and quality

16 -3- of social sevices have also suffered both ftom dhe decline In real resources and the inadequacies of public-setor management, including spending too much on salaries and new capital projects and too lte on rehabilitation of existing facilities and provision of operadng supplies. Within sectors, there has been :io bigb a percentage allocated to largely urban high-cost subsectors, such as hospitals and universities, and too little on more essentw and widespread services provided in primary health and education. Currnt &Wic Issues 10. The guiting principles of economic policy in Zambia should be to promote private sector growth and to establish a more efficient and equitably focused public sector. The first requirement of both wiul be to reduce inflation, and the key to that will be for the Zambian government to live within its means. Beyond that, the major public sector Issues will be prvatization, public sector mmanamen (including wage policy), promotion of free and open markets, and the provision of vital public services. 11. The central cause of inflion has been fiscal deficits. Tricks or technical solutions will not wort Zambia must contain spending and ensure adequate revenue to eliminate public sector borrowing from the banking sector. Spending on subsidies (apart from drought alleviation) has already been reduced and should be eliminated, particularly subsidies to parastatls, such as Zambia Airways. Budget provisions for input and output credit in the agriculture sector should be ended, except for the costs of a modest strategic reserve for maize. Wage spending should be held to about 4 percent of GDP, with savings from retrenchment used to provide higher wages for skilled workers. Spending on defense and paramilitary forces should be kept to a minimum. Some areas of public spending will require more resources, (for example, primary health and education, water and sanitation, and infastructure.) Most of the extra resources for these should came frcm reduced spending elsewhere and increased user fees, but some small increases in the revenue/gdp ratio may be necesary. In any case, structura reforms in the area of taxes and tariffs that might substantialy reduce revenueshould be avoided, particularly in the short-term when reducing ifion has priority. Improved budgetary planning, monitoring, and control procedures will also be required. The move to cash budgeting in 1993 will help, but strengthening of monitoring and control mechanisms will sfill be necessary. 12. MainhinIg a market based ex,z=bant (together with condnued liberalization of administrative barriers to export) is another essential ingredient if Zambia is to achieve sustinable economic growth. An overvaued exchange rate has been a major cause of inefficiency the past years, because it led to a plethora of administraive controls on imports and provided insufficient incentives for expanding non-metal exports. Considerable progress has been made in the past few years, and Zambia now has one of the most liberal foreign exchange regimes in Africa, with an exchange rate that is based on market forces and appears to be balancing supply and demand. Given the need for continued import compression and export expansion, it is essential to avoid any overvaluation of the Kwacha, because that would likely result in the re-imposition of administrative controls, cut off the anticipated non-metal export boom before it started, and send a powerful signal to the private sector that governmaent is not prepared to see the reform process through. 13. The excessive role of the public sector was a major reason for the low efficiency of investment and the inability of the economy to adjust to terms-of-trade shocks. Reducing that

17 .4- role, therefore, is another priority of the new goveraments economic refom program. It contains two principal elements - privtizatlon and deregulation. 14. Improves management efficiency, not so much because managers will be suddenly smarte but because the new and stronger incenives are likely to induce more efficient behavior. The dsrtcoming of parastatal management in Zambia are pardcularly evident in their failure to adapt to changing market signals and their inability to shed mes opaing costs when necary. Privaization should also increase feign investent and ease of new entry. Existing businesses, especially those operating with some success, may be more attractive to investors an starting a project from scratch. Moreover, transferring parastls to the private sector, sometimes including breaking up an enterprise Into several companies, should help to break the effective monopoly of some firms. Opening up the metal mining sector to private sector capial and experdse will be particularly Important if the sector's efficiency is to continue to improve and if the necesary capital is to be found to replace declnn ore deposi. To maintain copper production from existing mines, US$150 mislion a year wilt be needed for rehabilitation and operating puts over the next decade, some US$500 to US$600 million wil also be needed (mainly from foreign investors) to exploit new copper resources. 15. DKreua wil be particularly Important because the government has played such a major role in regult industry in Zambia over the years. Moreover, the major loser from over regulation has often been the new businesses, often beginning in the informal sector, which have the potenti to be a major source of new growth and poverty alleviation because of more appropriate labor costs and greater flexibility in production technique and Import dependence. Further deregulation wiul not be easy, however, because the obvious steps have already been taken. In price control, for example, the price limits have been elisr aed and the Prices and Income Commission abolished. For other regwulo interventions, however, reducing the heavy hand of gov ent will mean rewriting long and complicated sectons of Zambian law. This will require skilled labor, including both substantivexpertise and legal drafting skills. Considerable training and some short-term technical assistance wil be needed. In some cases, new areas of reguladon may have to be added. For example, with the privatization of natural monopolies and high transport costs often undercuting the role of Imports as a source of market discipline, regulations to assure a competitive market place will be needed. In some cases, quality standards may have to be developed to aid export markedng, but only if these do not become a tool for a cartel building and exclusion of newcomers and small producers. 16. In addition to changing what govemment does, it wil be critical to improve the efficiency of how governent does the jobs it reins. This has three principal elements - parastatal reorm, public sector mangement, and Improving the composition of spending. 17. Many will remain permanently in the public sector, including most utilities which would be difficulto prvatze under present cirance. For these, the challenge wil be to achieve effective commercialization - that is, operating as nearly as possible as if privaized while retning enough public sector control and accountability to prevent abuse of market-power. Intermediate organizations, such as INDECO, should be abolished. They have added little over te years and have resisted a pdvate sector-led strategy and reliance on market forces in the setting of prices and wages.

18 -S- 18. Zamba"s lac ks adequate capaity to implement mjor policy chges fective and to dliver usem public goods ad service. There are too many employees, partcurly at lower leves; wge are werl below equivalent pay In the prvae sctor r profe1ssi and skllfed positions; nd the managnt systems do not make the best use of eveo tng ponel. The govnment has made a start in addressing these problems and has adopted a far-rching =Wi1Iuator MUn M reform agenda In mplen this, the fcs shoud not be only on retechmet, but should emphasize dveloping a profssional cadre of public servns committed to serving public neds. Pofesionalizatio will require wage u for sprior performa and strog management systems i central minstries and at distridt levels. Effectiv management systms in tum will req inased Incentives and beter manaqn informati so th proams and budget can be moniored by senior managers. improvemens are also needed in cm nication and coordinaton. In shor, the government has put too uch emphasi on its role as employer and too lite on its effectivensin sevndg the publc thuh efficien plograms and quaity seice divery. ojt ic 19. The o akql ofin ikpn in Zambia has been Wwving recent yeas, but much more could be done. The emphasiswuld be on human resource developmen and infrastuctur,both vil to t rswuption of private secor growth. Spending on the military, overseas On, and subsidies to pataas should be kept as low as Possible to ensure spending on vital services (such as prmary health, watr and, primy educaton, and road _e ) can be incrased above th curnty inadequat levels. Withi sectors, ther should be less for the University Taching Hospital nd more for pdmary health care, less fr bulding new roads and more for m, lea for new bloom and more for i ag e efficecy of curnt ail car usage. No budget cu are eas, but these rellcao are enti for growth. (See Chapter 6 for more details on heath nd education and the Bank's recent Puic Expedit Review (Grey Covet Report No ZA) for other secto. nfsur Improvement cm cut costs to Producers and consums, thus Ilncraig the profitabbility Zambia's b and reducing the cost of living to conume. In the longer tem the key to Zambias foture b a heathy and well-educated workorce. Wihout that, dtere will be no substan increase in living stads. The problem is that these invmn take tim. All the more reason to st now, as quiy as possible, to stop the erosion in Ihman reources. Begnning impwv_ would also be a major boost to the political acceptability of the progm. Zambi may not be able to doue overall per caa consmption very soon, but it could more easily make dramtc and visible ovem In e health and education of its people. This wold be an ecellent place to start in delivering the bft of eoonomic reform. 20. Tho fital major poliy priority is creating the proper evionume for curaing the private secomr. In particular, this mn manag forelgn exhe resources, making sure sufficient land is avaiable for new fm and busises, and enng appropdate incentives and itional supporto enourage a big Inrase in the quantit and qulity of private investmet. Togethor with population plicy, the provion of vital public services, and proper stewardship of the eavionent, the success of the iitatives will detme th qualiy of life for Zambia over the coming decades. 21. EomLe zmu iludes pmong exports, dependene on impors, managig debt sernice, and making more efbctiv use of ernal. Ibes Wil be patcularly important becs mport avallability will be lmited even under the best of *ci. ITe goal is for nery a doubling in real GDP by the year Gim the limitations of exut copper mines and resources, ther Is no way copper exports can double

19 by then Indeed, it will take considerable effort just to keep copper output constant. External ass is already at exceptional levels. Debt service payments (as a percentage of the huge debt stock) are already rescheduledown about as low as possible. Therefore, two key policy piories wil have to be encouragemet of nontraditional exports and mnmization of dependence on imports, if growth is to proceed under these foreign exchange constraints. At the center of each of these wiu be maintenmce of a market-based exchange rate and the avoidance of the invitable polcl pressures to resist decreases in the cost of foreig excage. Also important for promoting exports are an effective duty drawback system, improvements in infrastructure, and increased availability of export financing. Discouraging the import of luxury consumer goods is understadale and worthwhile, but It would best be done by excise taxes and other broader forms of indirectaxation rather than by tariffs which are often evaded or which encourage artificial and inefficient domestic industries. 22. Short-term debt priorities include the continued pursuit of the most libr terms availe from Paris Club creditors, the establishment of a Qargely donor-fianced) buy-out of commercial debt, and the use of one or both of these techniques to deal with non-paris Club bilate debt, which Is currently not being serviced. Later in the 1990s, the debt service burden will increase as the amortization of rescheduled Paris Club debt and the repayment of the IMF rights program disbursement, begin. Creative approaches to moderating these burdens wil probably be necessary to ensure sufficient imports for growth over this period. It would be desirable to deal with these longer-term issues as soon as possible for two reasons. First, considerable uncertainty surrounds any estimate of Zambia's copper proceeds, and there is very littde cushion of margin for error in our projections. Zambia's creditworthiness for public and private sector lending (so vital to an increase in foreig investment) will be threatened if Zambia's longer term foreign exchange viability is in doubt. 23. On the donor relationside, the priorities are to keep the balpayment s uppo from failing off too quickdy and to make more effective use of project assistance (including tedhnical assice). There is a feeling among many donors that balance of paymentsupport should only be temporary for meeting the extra balance of payments pressures associated with a one time structual adjustment program. That argument would appear to be less relevant in the case of Zambia. The primary reason for balance of paymentsupport in Zambia is to permit the minimum import growth necessary for a sustained growth padt over the mediumterm, given the limited prospects tur copper exports and high levels of debt service. In other words, Zambia's import capacity will be highly constraned over the next 10 years, even if there are major efforts to economize on imports and to expand non-metal exports. (See Chapter 5.) Without some considerable balance of paymentsuppor throughouthe period, import availability will be so constained that the needed economic growth will not take place. On Zambia's side, strong policy performance will be necessary to justify this support, most Importany in containing inflation in the short term. Improvements in the management and budgetng of donor balance of paymentsupport will also be necessary. 24. The problem with ject assistance is not the amount but the efficiency. At more than $200 million a year, project assistance from bilatera and multilateral sources represents over 5 percent of GDP. Assuming that much (and possibly most) of this would be considered inve_tment, this is a large share of total investment Zambia. Looking at it from a fiscal pespective, tota project assistace represents nearly 20 percen of public expenditure, including provincial and local goverment Therefore, it is essentia tat these funds be allocated to priority uses and applied efficiently. Unfortnately, tat has not always been the

20 -7- case. Too often this assistance has been supply driven (that is, responding more to donor intcrests than Zambia's needs), poorly coordinated (oth with other donors and with government strategies and programs), and excessively fiagmented. Ther are more thn 100 separate donor-funded projects In agriculture alone, so it Is not surprising that govemnt has little idea of what is going on In many of these. They are often directed by the donors, sted by the donors, and contrbute litde to the development of Zambia's public sector capacity. The most serious shortcoming of this assistance, however, Is that too oen it Is not part of a coordinated strategy. Ideally, government should develop, with advice from donors, an overall strategy of public resource allocation across sectors and of public sector involvement within the major sectors (as Is being done in the health sector). Donors would then be asked to fit their assistance within these strategies. In some cases, there would be only one 'project" In each sector, and all donors who wanted to participate would co-finance it. Assistance outside that project would not be accepted. In other cases, individual projects would remain separate but would be identified components of a comprehensive sector strategy. In either case, more coordination among donors and more strategic leadership from government will be required. 25. Agdicultr has the greatest growth potental of any sector in the Zambian economy over the short and medium term. Arable land is plentiful, and yields are not neady as high as they could be. Zambia is using only 1.2 million hectes of a total 9 million hectares in available arable land. Nearly one million additional hectares is available in already exiting commerci farms alone. Two-thirds of Zambia's land is under customary (traditional) tenure, where the user has no exclusive rights. This makes capital improvements difficult, particularly for emergent farmers (those moving out of subsistence operation towards commercial operation) from whom much of the growth in the next decade is expected to come. Much of the state-held land Is not available for commercil fauming because it has not been properly surveyed. Therefore, the short-term priorities are to make better use of unused land aready in commerci fiarms and to accelerate the surveying proc to make more land available on a leasehold basis. In the longer term, Zambia will need a thorough review of the management of customary land to see what changes will be required to ensure that land availability does not constrain the growth in agricultural output in the next decade. 26. Increased efficiency of ew is expected from more appropriate price incentives and the greater likelihood that they will be followed because most of the new investment will be coming from the private rather than the public sector. Direct finacial incentives (tariff-free imports and tax holidays) should not be necessary, provided the rest of the business environment is positive. Better by far is to work for a uniform tax system with a broad base and low rates, emphasizing indirectaxation over direct income taxes. 27. An increased amount of new investment will be a prerequisite for tainable economic growth in Zambia. The investment/gdp ratio was high in Zambia in the copper boom of the late 1960s and 1970s, but it has declined below the average for Su-Sabara Africa. If the quantity of investment is to be increased significantly over the long term, adequate opporunities and finance will be required. Opporunitieshould be there, provided the privatization program goes forward, the exchange rate remain at market levels, deregulation continues, and ifrastructure is improved. Finance may pose a bigger chalenge. The first step is for government to stop preempting available credit by cuing the deficit and eliminating the need for public borrowing from the baking system hicreased direct freign ivestment and improved retaned earnings for existing busies wil awlso help, but Zambia's financial system will need to generate more savings, paricularly widh a long tetm

21 -8- maturity. Slower inflation will help by stabilizing long-term expectations, but the diversity of fiacial siions and hntruments will also need to be expanded. This will ensure an adequate pool of financial resources for private sector investment expansion, so necessry for longer term sugainable growth. _WIaeidTs nugmi 28. Economic growth is possible in Zambia under the right assumptions. A key assumption of the base case scenario presented in Chapter 5 is that economic policy continues to improve. Other key assumptions are that the copper price recovers to 88 cent a pound by 1995 ad then ises by six cents year to reach $1.20 a pound by 2000; copper output stays rocghly constant as rehabilitation Investments keep production up In the shorttem and the development of Konkola Deep offsets the decline from the N*hanga open pit In the edium-term; nontraditional exports triple by the year 2002; investment as a share of GDP ris from 13 percent In 1991 to 26 percent in 2002, mostly from increased private investment; and lnflation is brought down to 7 percent a year by 1B98 as government deficit borowing is eliminated. 29. On these assumptions (and with contnued strong support from the donors), Zambia's national output can grow at over. 5 percent a year for the next decade (following a strong wcovety from the drought in 1993). Agriculture would be the fastest growing sector at over 7 percent amuaully, primarily due to expanding the land area under cultivation, but also due to Improved efficiency in crop selection and location and improved yields. Total Imports are projected to grow at over 3.5 percent a year in real terms. Thus the import elasticity would be around 70 percent The incremental capital output ratio would be between 4 and 5 for most of the period. Ppulation growth is projected to decline from its current rate of 3.2 percento 3.0 perent a year by Together with an increasing investment/gdp ratio, this would mean that per capita consumption would only grow at about one percent per year. 30. Information is inadequate to make specific projections on employment growth or on reducing poverty. Employment, however, should grow at least as fast as output in the private sector, as deegultion Increases oppornities for the informal sector. Rural poverty should be reduced shaiply with Increases in agricultural output and land availability being much higer than popaion growth. Equaly important to the well-being of the low income popuatiwon should be dramatic increases that will be possible in the delivery of vital social services such as health, education, water, and sanitation. 31. ZambIs cutren rate of population growth is not compatible with long-term economic gowth and significant Improvements in health and education. The low prevalence of Contracepive use (9 percent) creates a vicious cycle of population pressures that lead to poorer public srvices per capita, which in turn lowers incentives to have fewer children. Zambia must take Immediate steps to pem citld spacing through provision of family planning services. Major increases in per capita incomes wiul not be possible unless the rate of population growth is substantially reduced. In the short-term, this will have negligible impact on output as most of the reduction will be in the number of children. Such a reduction, however, wi lower the dependency ratio, thereby significantly allowing Improved nutrion and health cae for all.

22 On health, the government has proposed a fudamental hift towards a basic package of quality health care as close as possible to people's homes. Inertia In the preset systm i strog, however, and teriary care facilitiestill take a large share of health resource. In eucation, the Qoverment has taken steps to ensure donor fuding for critical inputs to prmary education and has developed a policy framework. The government's commitmet to educatin and health will need to be demonstrated by improved budget alocati f the quant and quality of services are to be increased. Household food securty and nutrition remain a erious concern in Zambia with chronic malmurition well above the rae in counties at similar levels of development. For economic growth and improved agricultura production to translate Ito lower malnutrition, will require development of a consistent policy, increased capacity building for key insiutions, and a combination of agriculuwal diversification and nutrition i'nforatdon interventions. 33. In summary, the prospects for Improving living standards on a long-term sustainable basis in Zambia are limited by the constraints on foreign exchange availability, due In turn to the rnning down of the copper resources and the debt service burden, and by the legacy of inapropriate public policies which have resulted In a deteriorated infrastructure, an efficient public sector, inappropriate public spending priorities, and a private sector only beginning to look beyond the vagaries of public sector controls to taking profiable advantage of emerging market signals. Ihe Impetus for growth in the short-term will have to be greater efficiency brought on by incraed reliance on market prices, reduced regulation, incased land avalability, and improved utilization of existing unused capacity In those sectors consistent with Zambia's comparative aivantage, with the areas of great promise being agriculiture and non-traditional exports. In the longer-term, the primary challenges will be to develop Zambia's human capital, to deal with the debt burden, to increase the rate of domestic inveutment, and to reduce the rate of population growth.

23 I. lencom E OUTM -10- ANItIVE- A. The Evotuion atllilgihards 1.1 Living standa"ds for the average Zambian have been decreasing since about Figure 1.1 below shows on a per capita basis domestic production (GDP) and nationa income (GNY), adjusted for inflation. Table 1.1 shows additional data. Looking farst at per capita consumption, we see a gradual but steady decrease sin Gross national income has an even sharper decrease implying that consumption has represented an increasingly higher fraction of national income. In fact, consumption increased from 56 percent of ONY in 1970 to a high of 102 percent in In terms of constant 1977 Kwacha, per capita GNP fell by 40 percent from its peak, and per capita GNY fell by 60 percent. The decrease in GNY can be divided into two parts: the decrease in domestic production and the decrease in the terms of trade. These are also shown in Table 1.1. Domestic output has increased, but not as fast as population. In fact, real domestic production (GDP) never increased as fast as popuation in any of the five year periods shown. Zambia's net terms of trade decreased sharply in the 1970s but more gradually in the 1980s. Table 1.1 Ou and Mios of Kwaca in Censtant 177 Prim Real GDP Real GNP Real GNY Real Totl Consumption Popuation (000's) S Per Capita Real GDP Per Capta Red GNP Per Capita (NY S96.S Per Capita Rea Consumption Consumpo/ONY Iwestmet/GDP Terms of Tade (1977=100) Rel Imports (GNPS Millions of 77 USS _.. =..

25 lanplomet and Red Earnigs Dvelopmet. lho decin in red earg st in ear ta the declin in per capita income. Real earning In the fornm sectoro by 2.7 percet per yea duing , but by 1975 I gin bad all but disppud and aftr 1975, rea wages fell shaply Crable 1.2). b 1991, avage real eaings (wages and emoluments)wer only 30 prcent of the 1975 leve, with a low of 25 pecen for the _ced=g -sector. The rativo gain In agrictual wages over was lost In the lattor part of te 1980s. Despithe tsteep decline in fomal sectore earnings, cn of employee as a share in ai incomme ually rose from 57 pecent In 1975 to 63 percet in 1991 becas employment grew fster income and bocae the hionf sector (which acly has higer averageaings) grow far than the formal ser. 1.3 Ihe wage structu In the formal sector was nreasingly compressed over this perod of decline In wages. Whereas by 1990 the maximm basic unionized wage had declinod to 12 parco of ls 1974 level, the minimum basc wage had only deciied to about 20 perce of the 1974 level. The same pattern could be obseved within the public sector where the decline In wag was much less for the lower-income brackets. Tabs ii A.3n?J.U~k sh qtr. kw 2nd qtr. 2ad qtr. 2nd 5. Dec. March ApogslaImtFoomy II Ml.iq&Qaauyhw Ito III , SWAG" Taild Al 5rveiM exlude genpoioo inas a-mdb9csbwyco. megun Fc 1991 and 1992 It i an aveup of to earnings dtb two types of S5N CS% dbhindnaomoib b WndIat199 I;X Off,o thdo lwisdu. NboosmoirlsRiev, iany4ia b Mch1992; Cal IL & Ozyjm gtj etormi1m.e 1.4 Over the past 20 years, Zambis economic growdi has bee among the lowest in Afica. Some of ta is due to worening terms of trde, but more h due to low efficienc and (in later years) to decasing levels of investmet The expeence of other counies s that Zambias growth could have been swev percentage points a year higher (meaning GDP today would be almost double the current level), even with the drop in copper prces. Mhe prmary causes of tis inefficency have been the dom_ac of parastatals and

26 -13- their capital and Import-IntensIve strategis,. price conols, (especially overvaluation of the kwachs), and the Increasing shae of public spendki going to wages which has lowered public Investment and the efficiency of public svices. 1.5 At Independence lat 1964, Zambias economy was dominated by minerals and minitng, and managed largely by epris. In 1965, value added from mining accounted for almost half of fomal-sector GDP. Formal employment was mostly in mines, construction, and the government sector; I Industries (beyond those related to mining) were few and concentrad in the copperbelt and along the railway. There were large gaps in income and opportunity between those in the formal and informal sectors, those living in urban and nrual areas, and those living along the rail line and those In the more remote rural areas. 1.6 The task for the new Zamblan government was not just to redress imbalances in income distrlbution and economic power but also to promote growth in the formal sector which was expected to induce growth in the rest of the economy. In this regard, Zambia's mineral wealth was seen as national income which should be used to address social Imbalances. Elaborat in the official philosophy of Humanlsm', this strategy included increasin goveranent's provision of goods and services, naizing major industries, and the Zamblani,ation of forma sector employment. It should be remembered, however, that the Intervendonist policies which post-independence Zambia adopted were essentially to address the imbalances in income distribution and economic power between the haves (mostly non-zians) and the have-nots (virully all Zambians). What is more, these policies had wide support, outside as well as inside Zambia. Policy developments and exten developments after Independence can be divided into four time periods as chracteized below: Fadd Avafa JImead Oua Gsow b*mm NogHoh O"D wae 1975S1984 ailha Rapily Faii Zgo Terl May Pobleh; Few Soido Lve Stll Low Soe Une Tuulnce ad Reavey Tranion Some Sdil Low Nat Yet bnerg Low of Prmie; Recovery aw tlde to Show 1.7 In the years irmedlately after Independence ( ), Zambias government maintaied a fairly liber political and economic environment, even after 1968 when it annonced its interentionist intent In the Mul_nsbi Delraton. This decision (and its implementatin In 1972) came agint a background of modest growth and buoyant copper export revenues. Outp growth in the first ten years after Independence, when copper exports were strong, was modest but disappoiting. M cing led the way during the expansion, but agricultur output failed even to keep up with population growth. his was a time of false prosperity, missed opportunities, and transition toward a sam-controlled

27 -14- eonomy. in the scond period, , Zambia tried to gale with the impact of collapsed copper prices, miltary conflict I neighborng counies, and world oil-price shocks, al in the midt of inasing evidence of Its own stmuct problems. Unftuaely none of the gover s t_mpts at structural dcange was comprehensive enough, and none was sustained. It was a period of economic decine with few solutions. 1.8 With basic social services deterioratng during the fiseal crunch of the 1980s, percapita GDP tumbling, and investment sliding remorselesly, Zambia took some swiificant measures in to overhaul its policy regimes. The Govenmet then quicldy backpedaled. It was a time of turbulence and tranition. The current refonn period dates ftom Far-recg refonns have bee Insftiuted. Although GDP has con ed to snt nationalncome has been risng, thanks to the tems-of-trade impvement and ncrasing exnal assitance. There are encourging increes in exports and foreign investment. C. Pats and Sources of GDP Growth 1.9 Modest but steady GDP growth in the first 10 years after independence largely took the form of ewpansion of imnport-substitutn manu'curing. After that, GDP growth more or les stagnated, except for 1985 and 1988, years in which agriculture performed exceptionally well due to good rains. A large mumber of factors could acouwnt for the rise and subsewent stgnation in Zambias economic peformance. Certainly the worsening ter of trade were the initial cause of the decline, but the major factors charii Zambia's earlier growth, i.e. expansion of import substition Industries and e ding public sector dominance, have also been major cause of Zambias stagation durng the latter years. For example, not only was the public sector not providing an enabling envionmn for the private secoor, the unemployed were too ofte hired into the public service as a stop-gap employment progam even when there was little need for their services. In addition the low efficiency and decreasing level of inv t contrbuted to Zambia's low rate of economic growth, especially aiter Although domestic inv 8tmet as a share of GDP was more or less steady at 20 pecet beaween 1965 and 1974, Zambia's economy grew at only 2.4 a year (Figure 1.2). Enings from mind epos were relatively buoyant due to dsi copper prices. They were supplemented by external financing for imported capital and Int diate goods, which helped sustain a rapid expsion in m fu. Indeed, D? in ma c g grew at 10 percent a year and contuction by 9 percent (Table 1.3). By 1975, mcturig's share in tota GDP increased to 17 percent (from 6 percet in 1965), and construction'share from 5 percento 10 percent. At the same dme, agdulture was neglected. Changes in relative domestic prices did not favor agiculture products, and the overvaued exchange rant discouraged exports. GDP in agriculture grew at only 2 perceat a year, much lower than Zambia's popuion. By the early 1970s, the mining sector was also beginning to conibute less to the economy. As copper prices strd to decline (fom a high of more th $2.00 a pound in 1966 to less tan $1.00 in 1974), mining was besing to contribute less to the economy. On top of that, production was hit by floodin of a major mine in 1970 and by increasingly diffcult mining conditions Declining copper export earnings in the mid-1970s were acmpanied by lower mining and other tax revenues to tie govement. Measures were adopted to curb government spending, but they were not always enforced, and Zambia had high fiscal deficits even compared to other Africa countries. Moreover, excess capacity in manufcturng, along

28 -1Swith lower agreat demand, discouragd new and replacent Investmen. Domest Invetmen dopped abrply between 1975 and 1979 (Figure 1.2). Athough it revived modaey in 1980, lower lvels of Invtment continued hog ost of the 980g. Coucio so contacted as nvetmnt fell. The problem, however, was not just the fail in copper picem. Zambia's poor eonomic performnce was a the rst of Inppopt econmic policies nd xcesve Ivention ta led to a 8g dedine in efficieny. what wint wrong is esnal to diagning the ecoomic Mais nd Table13: _A mmauiih of Red GDPLrotuIhM _ GDP Tab A-lu u 2.S ,M "ong Mining C=dwi ICOR ONY INVIGDP IbIODP baum Th. Osnim SW1zlsn Office ad Bank S51.5 Eadmuze 1.12 Followg the Mulngusbi Declaraon, the Governm moved to take control of strtgic pas of th eonomy and to use state eerprses as th elin of d evelm The pionleerng role of establisig new busns and presen of the national Inbrest In ford-owne conpans wa vested In INDECO (a holing comny estblished for B no gr g 00opaes and lae put under the umbrella of ZIMCo (he stte master holdi compay). Bot Initiatives dveoped in the wrong direction; n business were held by ovenme fr too long, and th foeign entreprneurs ls contro of their Zambia 1.13 Becas of ov, excess capacty, and lack of competiton, parastal prices wo h4h. COMPO from aroad was limited by tariffs, high transport costs, and nontariff baies. Some potential amnew ents wer formally excluded, whiloe othle were dscouged by cess cap and uncerain access to Imports. Even where private cometo ested, It wa usully beter to follow the high pric of the pa because lowering prioe to captr mariet shar codd resuit in retalati and lmits on accm to fore excg.

30 Ihe Mulungs Declaration In 1968 and the fill IwplementatIon of the Declaration by 1972 marked the etablshmt of a more restcdve policy environment which: i) limited the deo of competion, interl and external, to which the domestic economy was exposed; ii) suppressed the role of market mechanms in guiing the alocaion of resources; and ill) ovely ended the role of the public sector. Despite various half hearted rem efforts, th policy regim remained largey inact unti Tho ramifications of this policy thrust were i a es k In the rpid emansion of the public sector, the Imition of a proteconist trade regim, and an Inability to adapt to a chnging enviment_. 1.S Betwee 1965 and 1975, the Zambian gvement eblish nly 80 parastatals (with a m*rity state interest In most) either through now investments or acquitons. Of these, 45 percent were In mac, 30 percent in retailwholesale, finance, and other services, and the remaining 25 percent in transport, griclture, and energy. Most of these cowanies had to rdy on imported machinery and equipment, and more than 80 percent depended on Imported intermediate goods. By 1975, the paals accounted for more than 50 pecet of output in and asport. They domind service idusties, such as iranc and wholesae/retai trade, as well as energy The rapid expansion of parastatals in the economy was accompanied by the growth of govnment employmen and public speng. Between 1966 and 1975, the direct govnmen payroll rose from 90,000 to over 125,000, whule fomal pdrva-secr ployment fell fom 170,000 to 120,000,j/. As a she of GDP, public spending rose from an estmated 35 percent in 1970 to more than 40 percent in 1975, led by the growth in overmen wages, increased subsidies on mealie meal for urban consumers, and increased military spending Growth in domestic n was also simuated by a protectionist trade regime. By dlowing higher prica for domesic producer through tariff and non-taiff protecdon, ther was a strong incentive for growth of import obstition industies and a severe bias against export. During much of the 1970s, the nominal rate of protecdon for all goods was estmated at 34 percent, and the efectve rat at 160 percenw. Thus, a typical firm could derive much more from domestic sales than exports The ti stru e also gave higher protection to domesti cosumer goods industries, less to itmediate goods ustries, and least to capitl goods. Nomina rates of protection In the 1970s were more than 80 percent for durable consumer goods, 37 percent for nondurable consumer goods, and 8 percent for capital goods; the effective rates ranged from perct for consumer goods to 35 percet for capial goods These incentives explain the rapid expansion of through import subtin and Zambia's inabilit to develop mafun exports. This orientton to the domesic market, the high dependence on capital-intensive and impor-intensive industies, and the dominance of the public sector (mosly through parastatals) created structural impediments,/ Employent data fortm paual sector ane avaiable only fr th peod sine 1975, whichlo sw an inacesg red. 2/ 1 dstes of taif poteon rtes wr mad in 'Zamba: nuadal Policy and Nfrna, P. 29, 1984 Wod Bat&

31 -18- that bedevil Zambia today. Witness the survey of over 30 fm chosen at radom from members of the Chambe of Commerce In Ndola, Livigston, and Lusaka (Tables 1,4 and 1.5). More than 95 percent of the fim wero established in , and nearly all geared production and marketg toward tfhe domestic sector Ttis infoma CEM Survey also confirm tat the capital sck, paticularly in public infrastructure, has been eroded. Most industralists have found it difficulto operate because of shortages in factory space, inadequate transport facilities, and botlenecks in telecommunication. Others cited the lack of basic urb inastructure, such as waste management and garbage disposal, as hamperingrowth. Morover, much of the capital equipment imported it Zambia in the 1960s and 1970s now has little useful economi" life; so, even under the right policy environment, producers would find it tough to compete effectively with others in the region and the world. Clearly, up-grading Zambia's capital stock is urgenly needed to complementhe efforts in parastl reform and privaization. T-b las CruG sem m CTOR 8R Uwma VERY TOTAL NO SEVERE FIRMS PROBLEMS WrTH D YASTMUCTRE OBSTACLE OBSTACLE RESPONDING Problem obtan8 _mndust paeo Powe breakdowns Voltae lucuat TelprgobleMs t Water pply problem Problm in wat water disposal Problems in wadelgstbave disposal Lack of exemala ad tanapov e Quality of roads Quality of raltway tnort Other 100 I Sourc: 1992 Woo Bank hmion

33 -20- D Tndusties with high effective rates of protection expanded rapiffl in the 1960s and early 1970s. Consumer goods industies, such as food processing, with the highestariff proton grew by more thad 100 pecent in ; textle and apparel grew by 13 percet a year between 1965 and Industri auay prected by high tuasnrt cost, such as basic metl and metal products, also expanded rapidly - by 12 percent per yo - in Ihe top perforing Aubctor, with annual growth of more than 30 percent, was chmicals and chemical products. This was due mainly to government investment in indusial chemicals - a big state-owned frtizer factory built to substitute for fertlizer Impous Revenue from copper exports allowed Zambia to maintain higher imports throughout There was, however, a dear shift in th composition of import, due to the growth of domesic mport substitg industris (Table 1.6. The decrease in the sbare of food and oter non-food Imports is consite with the growth In domestic food processing and other non-food light Industries. At the same time, th growth In domestic m c pardculay processing, sustined demand for impots of both capita and nermediate goods. The shift in composition also appears consistent with the relative tariffs on the three broad cagories - ta is, the highest on consumer goods, lower tarffs on inemediate goods, and the lowest on capital goods. Tabl 14: W*Vbdo. of Imouod km ad Use COAOnnxr Goods Food Ptod7uot Oe Non-food Dob"ls kietsmadkto Goods Capital Goods TOWl Toa t I US$ ToialasSofGDP Pat nd 1980, dinstss an ftxom dt Wcud hak vopot% 'Zamida: JIld PW4icy and hsbxrmanm; for 1985M d 1990, ulmin4smbsat.d as daue pwrwid dbyw Caua &tsu&dia Offitc 1.23 Early expsion through Impor substtution reflected both supply and demand factors. On the demand side, national income was rising, thas to increasing revenue from copper exports, and consumer demand for goods and services was strong. Moreover, the public sector was expanding rapidly, creatng markets for domestically produced goods and services. From 1965 to 1975, paratat invesments accounted for more than 25 percent of GDP, and goverment spending for another 3540 percent. More importaty, when Zambia was deprived of its trade route through Rhodesia In 1965, there was surge in demand for

34 -21- domestic substitutes for manufactred Imports. On the supply side, exports of mining products performed well, and the imports of capital and Intermediate goods were readily available and cheap, thanb to the over-valuation of the Kwacha In the immediate post-independence period, Government economic policy was relatively liberal. While the public sector was expanding apace, the private sector was not much discriminated against. The systeic and deliberate attempto suppress the private sector was not formalied uil 1972, when Zambia becme a onepr state But Zambia's efforts to protect these paraststal mauc came at a price. For the consumer, there were losses in real Income because Zamblas had to consume less while paying more for the protected product. There were also production losses becase resources were withdrawn from other activities (including export production) where they could be used more efficiently. There were also more genera losses in efficiency. Zambia's paratats and protected monopolies were characterized by laxity In cost minmizaton, while charging higher prices at restrained levels of output. Costs of protectio in Zambia have not been quantified, but studies In other countries give clues. For example, removing import quotas in Turkey in 1978 would have raised GDP by as much as 5.4 percent. 31 And abolishing quantitative restrdcons and reducing tariff and exportaxes in the Philippines in the same year would have increased GDP by as much as 5.2 percent. 4/ E. Adiclture 1.26 Agrculture production depends on (public and prvae) investment, the general policy environment, land availability, and weather. Public spending comprises research, extension services, Infastructure, and commodity subsidies. Private sector investments consist of caital (farm machinery and equipment) and technology (seeds, irrigation, and soil consevation). Unfor ely, Zambia's data on public investment are partial and unreliable, while those on private investment are almost non-stent So, measurement of agricultural productivity and its sources by conventional methods is impossible Although real agricultural growth averaged only 2 percent a year between 1965 and 1991, it reached 7 percent in , which indicates the sector's capacity and potential for high growth, provided both market and government faflures are corrected. Paradoxically, this Impressive growth occurred when agriculture's terms of trade were worsening. Why? First, agriculure still offered better investment opportunities to domestic investors than, for example, m rg which was suffering from severe shortages of raw materials and spare parts as a result of foreign exchange constraints. Fertlizer, the only operating expense requiring foreign exchge, was readily available ftrough preferental foreign exchange allocations and donor support programs. Second, because of the high proportion of smallholder production in agriculture, the sector is less sensitive to price incentives ta to non-price factors. Despite this improved perfomance, however, Zambian agricultural growth 1/ 'A Genral Eqilibdum Es _maio of the dfets in Reduetio of T and Quantitati Reictons in Turky in 1978I Oras, d Mdo and Urta in T.N. Sunian and John WMUey, ods. in al Bau1 Trade PoLov Cambridge, Mass.: NUT 4/ %ftractous bee Trade Policy and Domesti Distoins Ramn and John Walley, 1985 Wodkig Pape No. 8522C, Univsity of Western Onftrio.

35 -22- remains fragle, becase of weather, high subsistence production, extremely narrow export base, and its lopsided crop patters Vaiadons In weater critically determne agricultual growth In Zambia. All crops (except sugar and wheat) and livestock are rained, and four droughts, between 1974 and 1991, substnialy reduced outpul Yet, Zambia has a huge irrigation potential, the development of which would minimize agriculture's vulnerability to vagaries of the weather Much of Zambia's agricultural production is subsistence production, retained for consulmption and seed by traditional smallbolder households. It prevails in Zambia despite limited support from government. Although subsistence production has been declining in recent years, it still accounts for more than 50 percent of agriculture output. Its growth, however, averaged only 1.2 percent a year in , far below population growth. This prvalence of subsiste may constrain the sector's overall supply response to policy changes (especially price incentives) in the short run, since traditional smallholder households are liky to respond more positively to non-price incentives (for example, agricultura support services and infiastructure). Public investments non-price incentives, however, have been inadequate, which has delayed the transformation of smallholider agriculture toward marketoriented production Agriculture's export base is almost non-existent. Export production consists maily of small quantities of tobacco, cotton, coffee, and beef. Save for cotton, growth in export crops has been small and sluggish and exports of sugar, maize, fish, and forestry products are small and erratic. Zambia is the only country in the region without a developed agricultural export sector, although I has considerablexport potential (see Annex B) Lopsided crop patterns are evidenced by Zambia's extreme dependence on crops in general and on maize in particular (Table 1.7). Maize accounts for about 70 percent of the lad cropped and for almost 85 percent of crop output. In 1988, maize production increased by 90 percent, which was largely responsible for the 20 percent agricultural growth. Government nt strategy has consistently allocated more resources to crop development tha to other subsectors of agriculture; narl resources, forests, and fisherles, for example, Joiny accounted for only 18 percent of public spending between 1985 and Private investment is generaly low in non-crops, so the slow growth is not surprising. The goverment's program to achieve self-sufficiency in maize has involved guarteed ptoducer prices, subsidized consumer prices, and an expanded network of Anput supply and maize collection depos (using maily cooperative marketing). As a result, maize production became distorted and expensive, with a shift from low-cost farming close to main consumption centers toward more disnt and high-cost areas Cable 1.8).

37 -24- T" Egum (In Macn bb)n Yent Low-cost Pmrvin 11 HIhs Povin V Natonl Totl $2.0 1U It Southern CentmaL and Lusaka. 2V Basn, Coppalbto NorhNomthwese, o: CSO, Namboar, and ZCF Date. Westr, and Luapua Expansion In cropped area has been a more important source of growth in Zambias crop sector hincreased productivity. Between 1974 and 1991, for example, the growth of maize, millet, grundut, tobacco, and soybeans ouput seem to be due entirely to incree In cropped ara which averaged 10 percent a year (Table 1.9).Yi This expansion of cropped area is made possible by Zambias abundant land, land tenure systems, and the larg smaiholder subsector Most of ZmbiWs highest potentia cultivable lnd (etimated_ 1.4 million ha) is ent i densely populated areas and is in use, but 84 pecent of cultivable land (about 8 million ha) goes uncropped each year. About one milion hectares of cultivable land already part of commercial fm is not utilized because of ndeguat ientives. Except in developed and densely populated areas of the central, south, and eatern plaeaux, agroelogical condions do not appear to restict expansion in copped area. Land supply in most parts of Zambia is likely to remain elastic in the medium to long tm, and tis has iportnt mphlicatio for future growth. (See Chapter S for more det on land use pattern.) 1.34 Tditionl land tenure does not appear to have preluded considerable expansion In cropped area by smallholders, although expansion on state and tust-lands by medium and largencale farmers might have been constined in part by temr uncertainties, to which c cal ag lture is highly sensitive. MIe predominance of traditional tenure systems wil contne to limit commercial production. / U_wal, th usta on gross out in Table 1.9 do not xpper to be const wih tho ofil dat an GDP grwth In aur. The grow rate In Table 1.9 ae much ighr. We onclud dti I noaos, howevr, because It is tho ony data on ths suject and beaue oth ie cmpootan of lad inas and yild h s I o ten with our undesanding and odhr evidenoo.

39 Smallholders with an aveage of 2 hectares account for 65 percent of land under cultivation and their greatest numbers are In provinces where land supply is still highly elastic (Northern, Northwestern, Weste, and Luapula). (See Table 1.10.) Here expansion of cropped area has been generally faster than in the more agriculurally developed provinces (Southern, Central, and Eastern). Smailbolders' share of cultivated land is highest in paddy rice (95 percent), millet md sorghum (90 percent), groundnuts (8S percent), cotton (67 percent) and maize (60 percent). Medium- and large-scale commercial farmers, on the other hand, epanded areas under wheat and oiseeds. The significant increase in small-scale commercial famers (known as 'emergent farners'), who each cultivate an average of 10 to 20 ha., also conibuted to area expansion. Although their numbers increased from 25,000 in 1965 to about 120,000 in 1990, these farmers, who produce a large marketable surplus using oxen plows, improved seeds, and fertilizers, still account for only 24 percent of all farm units. Convertig smaluholders into emergent farmers of strategic importance in improving the growth performance of agriculture, but this will require the right price incentives, land, adequate credit, and an improved research and extension system CMo Kgduc0vity (or yield growth) derives broadly from changes in technology and cropping intensity. Better technology includes improved seeds and modern inputs (fertilizers, farm chemicals, machinery, and irrigation) and improved fuming practices. Zambia has Improved the range and quality of hybrid maize in recen years and adoption rates by smallholders have been good. Ihe area planted to hybrid seed doubled from 275,560 ha in S to 544,160 ha. in The share of maize planted to such seed grew from 47 to 60 percent, although some hybrid seeds are ill-suited to areas with uncetain and uneven rainfall Even so, for most crops, except wheat, sunflower, sorghum, and paddy rice, yield growth has been negative (rable 1.9). Even maize, the centerpiece of Zambia's agricultura rearch and eotension ft8, saw a 2 pacent decline in yields between 1974 and Ihe prepondeance of smallholders d unsatsfactory husbandry practices explain some of the decline in yields. In Zambia, maize yields are especially senstive to late planting (which is common), plant population, and weed compedtion. Adaptive Research Planning Team (ARP1) studies in Zambia show that untmely and minimal weeding reduce yields by almost 50 perceal Zambian (and Kenyan) research trials have also shown that good husbandry practices (early planting, timely weeding, and appropriate plant populations), are relatively more importanto yield increases than ferdlizer application - and, given the ending of fertilizer subsidies in Zambia, less expensive. With the right combination of improved seed, husbandry pratices, and fertilizer, however, yields could improve fourfold in smallholder agricuture. For the best-pe ming crops (wheat, cotton, sunflower, mixed beans, and paddy rice), both yield and area increases contributed to high growth rates Uyestok-. Increase in numbers has been the major source of growth in Zambia's livestock Crable 1.11). Certainly this is true for the 3.4 percent average annual growth rate in beef production and was also the case for the dairy and poultry subsectors. More pure and cross-bred animals in the dairy herd, however, increased productivity by about 1 percent a year in Due to feed supply problems, poultry productivity declined at an alarming 4.4 percent a year in the same period.

40 -27- Table 1.11:. humu.aof in!ib In thelkizatk &AhaL (Anual Pcntage) 4Iwo SubsecterCommcdll Lwrsa in Off-Take Rate Productlvk Physia Producio HeaNumber Inoraw Cowt Rate e0ca0ff Daky Poeuy o: Misieon etiates Survey data, though Inadequt and Imprecise, indicae that e s productivity In traditional beed production is uisary by most measures - for example, average lveweight per livestock unit, milk yield per lacion, calving rates, and age at first calving. his Is partly due to poor aimal busbandry and health conditions and inadequae animal nutrition but also lack of progeny tesig and selection among aive breeds, which has rled In widepread Inbreedi Substantial Improvemen in commercial livestock productivity are possible, using nafive breeds. As in crops sector, improved husbandry is necessay and could improve production by up to 30 percent and milk 50 pernt. The existing large herd of native breeds could be exploited with minimal investments in feed production (for example, hay prepaation), of supplementary feeds (molasses and minerals) and extension services on anima husbandry and ntrition. Government policies and programs have not focused on inreaig production without chaging the in traditional genetic beef *ase Cattle producton has also been hit by diseases and setse intaton, despie incread Government investment. Trpaosomiasis, trsmitted by tsetse fly, is seious, with almost a third of the country tsetse inested. With much public expendiue, goverment stratew has concentrtd on controiling iation on state land (commercial farmng areas) and where betse was threatening native cattle stocks. The latter has had only partial and temporary success, as re-infestation frequently occurs Te of e. In , barter tems of trade (the quotient of the agricultural prodce prices index and the co of living Inx) wee depressed. So, too, were inme terms of rde, tat is, barter tems of tradoe multiplied by a monetion index (Table 1.12). Agriculu prices have not risen as fast as other prie in the economy based on offici producer prices. Between 1981 and 1986, real food prices kept pace with other prices, bw they dteriorated significanty thereafter, reflecdng the Government's determinaonto kep them low in the face of higher inflation. Income terms of trade, which capture the impact of incrased marketed quatity and better reflect farmers' financial well being, declined for the same reason. The terms of trade for export crops deteriorated sharply after 1982, underscoring the export subsector's mediocre performance Deterioaion In the terms of trade for agriculture, as perceived by fanners, undermined the sector's profitability compared to other sectors of the economy and reduced resource allocation to agrcuture. This reduced agriculture's contribution to economic growth below what it could have been had Zambia's farmers faced market-sed prices. Recent decontrol of producer prices and market lberalization, however, have improved agriculture8s terms of trade.

41 , PrPce controls and an ovevalued curcy a, offectively, taxes on him lncomes for ll commodities In Zambln agdiut. Hadest hit we cotton and tobac (eport cop), and import-rplaig commodties (mize, wheat, and olseds) Th effect of pohly disto on fator nome has a bn sever Zamblan smaliholdsd d amost entirely on Incom from labor. For example, etmates sugges tha in 1989 they ened only o bourte of incoms tha thy would have recdved In the absence of dbtordo In ouu prices. This a aves rur povety and makes rura Zambians relatvy susceptdble to food ecurity. Such polc-iduced bias will ned to be evesd if th sector is to contibute more significantly to wages and me gs tion I the near fut include basic agricultura srvices (researh and extension), rual finan sices, and tructure (maketing, storage, processig, roads,. I I and irigation). Govermen has played an almost exclusive role In the provision of hes services; price controls for tese servces and exlusive rio have vuy sflod prvate itiadve. Food cop E Cop Tam.f TOM of xm 8_ Be IdLh t f O O.S ao * IdhrTlmui afthd - J oaiszoi miu1iu PmwPoser Weahdof mr1p1ue hboomterms of Trod *MM bmw aohio ftdj abxkpsofbuisatodnmi hayo rm C _b S T

42 Studies in India, Latin America, and some African countrie show that non-price incentives play a crucial part in farmers' supply response - more so for Zambian agriculture, with its relatively high reliance on subsistence production. In particular, inadequatextension services, rural financial services, and transportation systems will continue to adversely affect farmers' supply response, even with improving price incentives Agricultural technologies generated by research and their transfer or dissemination to farmers by extension service are key to increasing productivity. These agricultural services, monopolized by Government, have been inadequate in quality and coverage. Adaptive research for Zambian smallholders is still in its infancy, while a disproportionate share of research resources and output goes on basic research The quality of extension and research are inextricably linked. Deficiencies in research, largely supply-driven, affect the extension program. Research is often irrelevanto smallholders' constraints and needs. Moreover, access to extension is limited, covering, only about 25 percent of smallholder and emergent farming households. In the past 15 years, budgetary cutbacks have not only hamnpered wider coverage, but have left the extension semce with too many personnel. Inadequate operating expenditures (and weaknesses in setting priorities and developing effectivextension methodologies) have rendered the service ineffective and in dire need of strengthening Something must also be done about rural financial services (credit and savings). Small and poorly developed, they have not been readily available to most smallholders, which hinders the adoption of new technology by farmers. Distortions in financial markets (interest rate controls and subsidies) and institutional and management weakness in government rural financial programs have also restricted rural financial services Removing distortions in financial markets can be tackled in the short-term, but it will take longer to develop appropriate rural financial institutions and markets. Increasing smaliholders' access to credit is critical to farm investment and adoption of new technology to increase productivity. Recent interest rate decontrol is a step in the right direction. It will enable financial institutions to develop viable credit programs and to restore financial discipline in rural financial markets. In the long-run, promotion of less formal financial institutionshould be encouraged - for example, rotating associations (ike the Susu in Ghana), women's savings clubs (as in Zimbabwe), and farmers' credit clubs (as in Malawi). Also encouraged should be participation of private agribusiness enterprises in credit retailing often within the framework of outgrower and tenant production schemes. F. Finandal Stem 1.53 The Bank of Zambia, established in 1964, oversees the banking sector (with the Ministry of Finance) and determines Zambia's monetary policy. Zambia has 12 commercial banks and a wide array of non-bank financial institutions. The financial system, however, is neither sophisticated nor well developed. There is no inter-bank market, money markets are rudimentary, and, because of recent events, banks are balking at some forms of lending Commercial banking comprises three groups. The first is the long established banks - Standard Chartered Bank, Barclays Bank, and Grindlays Bank (all majority foreign owned) and the Government-owned Zambia National Commercia Bank (ZNCB) established in Excluding Grindlays, these dominate the setor, although their relative position has been reduced by the entry, in the 1980s, of eight new banks. The second group, smaller but with international connections, includes Citibank, Meridlen and Union Bank.' The third group comprises five small Zambian banks (some with foreign interests) Indo-Zambia Bank, African

43 -30- Commecial Bank Finance Bank, New Captal Bank and Manifold Ivestmn BDak. bn addiion to noma commecal banking, the sector is engaged In loan syndications, bond Iues, foreign exchange markes, and ntg In T-Bills New entran kae been attracted by high reb on assets (rtangig from 1.2 to 105. percent In 1989) and on equity (from 18 to 85 percon). The un-reed natr of banking entry by the Bank of Zambia and the low capitalizaon rieme undr the Banking Act have alo helped There are also two specialized banks. One is the Zambia Export and Import Bank (Bxm Bank), a small instution dealing with pre- and post-slpmt credit for exponrs and likely to be closed soon due to poor performance. Th other is Equato Bank, which provi merchant bakdng service and extemal lines of credit Zambia also has severaleasing companies, most owned (or partally owned) by banks. The non-bank financial sector also Includes the Zambia Nadonal Building Society (ZNBS), which prmvides mortae finace; the National Savings and Credit Bank (NSCB), runm lke a post office savings bank, but with small amounts of leding; the Lima Bank, an agrclural bank; the Development Bank of Zambia (DBZ), which Invests In equty and long tem loans, and with which the World Bank and other donors have had a long associaon; and the Small Industries Developmt Organization (SIDO) which provides fiance and related sevices to the small-scale lndustial sector Until recenty, Zambian's insurance sector was monopolized by the Zambia State nsurance Corporation (MSIC) and its sister company, Zambia Natonal State Insurance Brokes MZNMB). New entry is now allowed, but the parstals still dominate, pardotularly In reinsurance. Private sector employers and employees also contbute to the Zambia National Povident Fund (ZNPF), a compulsory private sector provident fmnd. 1.S9 Adjutmt in the late 1980s and early 1990s has hurt the development of Zambi's finanal sector. Although there are no ceilings on bank lending to the private sector, the goverment has used reserve and liquidity requiements to limit credit. Hardly surprising then that banks have focused on short-term lending to prime customers. In addion nonbanking institutions which have traditionally been long-term lenders In the economy, such as the Development Bank of Zambia, are wary of client exposure to forelgn echg ridsk when the kwacha has been depreciating a rapid rate. As a result, long-term lending is at a viru standstill. Ihe only money markets, at preset, are in Tuy Bills and, despite the recen moves towards prvatitlon, equity markets are not wejl deveoped Despite the varisty and mnmber of institutions, Zambia's finacl sector lac dep To assist in its development, tho central bank will need to ast a greater deg of macromoneay control within the economy to esre a tightening of liquty, so that banks wil more actively compete for funds and help develop active money markets; to ensure that commercia banks are adequately capitalized and are operaig prdety; to hdp develop capital market s, and secondary maets; and to assist in developing longer term sources and uses of fimds to finance the development needs of the economy. G. An Analysis of Zambla's Growth Perrman 1.61 Ih_ ne tfor SbcIiL Mustm A policy dvrne cuu by fth dmia of the public sector, the sressio of market hs, expots in faor of import subsdtution, and the inbility to divesfy from mining made Zambia pculardy vunable to the large and sudden fluctton in the trms of trade In the

44 s. More of the decline In nadonal ouwut in the years following the exter shock, however, can be att ed to faures in goverment policies than to the negativ effecs of the shock itsef To compare Zambia's gowth performance and policies with that of other countries, Table 1.13 shows the pecentie raking of Zambia In terms of economic growth and a number of country chatertics known to be correlt with growth perfom ce. The frst line shows that the primary enollment ratio In Zambia in 1960 was higher than only 26 perct of the tol crossuntry sample, but higher than 60 percent of the African countries (Io tablo does not show the actua enrollment ratios, only Zambia's ranking relative to other countries.) The following polnts stand out from the table: Table 1.13: CguuRI blfj mnd Oa Paeretagu) ForesiD Ranking of Zambia Ih Wh ad Countries Africa Only I*Wol Cw8niamr Prmay Erolmen Rb., 1960 _onday Daroiht Rido Gowrams2t ConsumpdoalGDP, avg Publi Sector Deficit, Mc. DLucrls 6 Jlat ZkDpdh: Avg. Iput Pde to biel Avg Varanoc of Ilput Pre Aro Sector, S0 Ratio of M2 to GDP, avep, Shm of I11nr_t in GDP, Ppuado Growth Rate, Goeue Peuybnmaee: Per Capita Grwth Raft, Gawth Rdal conetiag for nvedmat Wando faco 3 6 e: Frm data ban complied by Wiiam astery for Wodd ank reseah paper, How do Natonal Polc Afft LangWRun Grow, foomig in Jonal of Mv meonomls * Zambia had one of the worst eonomic growth rates in the world over (5th percentie), and one of the worst In Africa (17th percentile). * Althou ouput growth was poor, Zambian investment ratios were among the highest In the world over this period (88th percentile). * Factors partiularly unfavorable for per capita growth included low inuti human capitl, very high government consumption, the world's highest fiscal deficit's, and very high population growth.

45 a -32- The growth residua after controlling for Invemen and other country charctersticss among the worst in both Africa and the Wodd, indicatg t Investen effiency was extremely low Econometric analysis of the growth perfmace across countrie suggs that policies matter a great deal in expining diffrng rates of eonomic growth. Estima of the GDP growth performance relative to policy variables (in Table 1.14) show that a rform package that In the long run raised enrollment ratios by 10 percge polts, eliminated a black mart pmium of 20 percenge point, raised equipment invtment by 3 perce pois of GDP, and increased financial depth (M2G/DP) by 10 percentoge poit could be predicted to aise the annual per capita growth rate by 2.6 percentage points in the long rn Tabe 1.14: a Repesntnga will change rt An locrease In of percentae movement of (in pe_centae points) (sdamd deviation) poit by) w_neagdp to.2 Prmaty olhat Ratio 10 as.2 to 3 Scoaday Enollmt to.3 Black Makt xhang Rate.33.4 Premium over Offiial Rate 10 Ratio of M2/GDP to.4 Aveamg Producer Input Pice.1 Comad to Worid PAoes Ratiof Government Cnmpin10 to OD P t Ratio of Equi;vnt Iesmat to GDP uretwodd ak Bconom s Depatmnt, 0 Number S, November A graphic illu on of Zambia's poor permace can be seen in Figure 1.3 which shows the results of a regression to predict economic growth based on a cowuy's cha cs, including invesmt rates but aso including many other factors such as human capital. The regression itself showed good reslts, i.e., it was able to account for most of the diffeenc In growth rat. The figure shows each country in tems of its rate of economic growdt and invement level. Clearly Zambia's growth is well below wbat Is invesuent level would suggest. In fact, its investment level equalled that of Korea over this period.

47 To be fair, Zambia did suffer from an enormous terms of trade loss in the 1970s and disruptive wars in neighboring countries, which would have been diffcult for any economy to absorb. That terms of trade shock amounted to 2.5 percent of GDP; econometric evidence suggests that for every one percent of CDP terms of trade shock, subsequent annual per capita GDP growth is lowered by.4 percentage point. Based on these estimates, Zambia's GDP growth rate was one percent a year lower In the 1970s than it would have been withouthe decline in the terms of trade. Falling copper export earnigs after 1974 eroded the capacity to import, resulting in an economy-wide shortage of inermediate goods and spare parts. This was critically constraning to manufactring, which had been built on consumption of imports behind a high wall of domestic protection. Consequently, capacity utilization declined, and output growth slowed; framented data show that by the mid-1980s, capacity utilization in manufacturing was less than 60 percent, with wood and wood products as low as 30 percent and paper and paper products, 35 percent.f/ Problems were compounded by government intervention in parastatal entprises, often resulting in wastage of scarce managerial and, through subsidies, of financial resources Zambia's overall economic stagnation was, therefore, primarfly the result of poor economic policies that allowed only modest growth with the high investment in the good years of , but which constrained Zambia's ability to respond to the extenal shock in the bad years that followed. The economic structure established through high protection, public sector dominance, and import substitution in the early years after Independence was too vulnerable and too rigid to adapt to changing eternal and internal environments Zambia's domestic investment expanded greatly in when development fincing was easy due to buoyant copper export revenues. Investment took a sharp downturn, however, from 1975 to 1980, wvhen imports were depressed. That down-turn in investment, the year-to-year fluctuations in GDP growth, and imprecise data make it difficult to pinpointrends in investment efficiency. In particular, there are indications that data do not captue non-imported capital goods purchases very well. Evidence, however, suggests that investment efficiency in the early period was particularly bad. Much investment was in.anufacturing, largely dependent on imports, and mostly in consumer goods protected by high tariffs. Incremental capital output ratios were more than 11, even excluding the years of weatherelated crop declines. Overall efficiency improved in the 1980s, as the economy shifted towards agriculture and reduced big new parastatal investlms SummaM. GDP growth in seems to have been suboptimal at both micro and aggregate levels. At the firm and sector levels, most of Zambia's manufacturing productive capacity still in use today was created in those years, when public investment went to the creation of parastals which had high recurrent and rehabilitation costs such as the NCZ fertilizer plant, or which operated at low capacity and low efficiency from the start (for example, Mansa Batteries). Sector-wide performanceven before the copper price bust of 1975 suggests that the capacity utlization in parastatal companies was as low as 46 percent in Indeed, Zambia achieved a higher annusl GDP growth (3.2 percent) with lower investment in , than was achieved in with high investment. This may mean that investments the earlier years were so inefficient that a window of opportunity for sustainable growth was lost and that the partial adjustment of sector policies in later years more than compensated for the lack of investment. f/ Source: Orowth an Adjustnt in Sub-Saht Ati DJ. Nd prenateo of papa at Xt Word Bank Africa Economic hasus Conehoc, Nairobi, lun 1990.

48 -35- B. BALANCE OF PAYMENS 2.1 Both external shocks and shifts in govemment policies played a major part in Zambia's worsaing extn balance in Crable 2.1). The current account was hit by oil price shocks and falling copper prices, compounded (from the 1970s) by declining production at Zambia's aging copper mines. Domestically, an ovwrlued exchange rate, excess prtection, and import licensing regimes contributed to a misallocation of resources and created highly capital and import-intensive production. Tbus, Zambia resisted a reduction in imps when the value of exports fell. Consequently, a huge debt stock accumulated, and Zambia's creditworthiness fejl, as the country borrowed to jfnance current account deficits. Table 2.1: uafe hof- otamse, ZUS M_}s 17ifl, _. ' ' D- -., m m S S 1990 Expoiu of GNPS h pos of ONFS ResourBalanoe F Lco servie Not Tnfers Cumat Acoo( Baanc (w/o grants) Lang Torm Capital Inflows SaM IMP Saff A. he Curet Account 2.2 From 1970 until 1990, Zambia's current account was in deficit for all but three years, averaging $315 million (11 percent of GDP) and reaching a high in 19-M82 at 16.2 percent of GDP (Figure 2.1). 2.3 Until 1981, the trade account dominated movements in the current account, as the services account remained a relatvely constant share of output. With the exception of 1975 (the copper price bust) and (a world-wide recsion), the trade account was consistently in surplus. In 1974, it reached $6WS million (21 percent of GDP) and peaked in 1979 at $652 million (19 percent of GDP) due to high copper prices. The service account, however, was in deficit over the same period, averaging 17.5 percent of GDP. lhis was pardy due to the dominance of a technologically advanced export (copper), which reqires significant use of overseaskilled labor; high interest payments on external debt, at least since the early 1980s; and Zambia's landlocked location which resulted in high transport Costs. The services account deficit was only partially offset by the trade surplus.

49 Since 1981, the rlativ stablity of the two accounts has been revesed. lhe trade surplus has bn steady (increasing slightdy as a share of GDP), while the services deflcit worsened before improving slightly as a share of GDP. Movements in the services account now dominate the curet accunt balance, due pary to Zambia's erratic debt service paymen. Figure 21: Tstdg In the utru. tad and seviecs accouns ' l87 L1 9 b1 i I.s W I I I S current account + trade account * mwayce account B. Elkpda 2.5 Zambia's export have long been dominated by metals, prticularly copper, Table 2.2 shows that export concentration has been high by any standard, suggesdng ta export diversification efforts have not been very successful.

50 -37- Table 22: Ii moirfrimim ($ MMlls) aj.wmm.ing _ Copper I/ zinc Lead Cobakt Tobacco Maize Elcticiy Other Total Memo: copper Volum ('000 M -) Copper Prie (US$MfT) Copper PrKIe (Conantr MIMIM) I_I Non-Tmditiondl Bxpot as % of Total I/ COpper xpotss are from Vbl DOP sop matoes. OCher export are from CSO. 2.6 From the late 1960s uil 1974, Zambia enjoyed a period of exceptionally high copper Prices. Between 1974 and 1982, however, there was a large and protracted decline in copper prices. At the same time, import prices rose steadily. 'Me resuling deterioration In Zambia's tems of trade meant a huge decline in the purchasing power of Zambia's exports (Figure 2.2). Despite some compression in real imports (down by nearly 50 percent from 1975 to 1990), imports still exceeded the reduced purchasing power. Instead of adjusdng to the erosion of purchasing power, Zambia rned to exta borrowing to finance its large investment program. Moreover, a fixed and overvalued exchange rate made Imports artificially cheap and removed a market-based tool for reducing imports and increasing export. More import comprssion between 1982 and 1986 brought actual import values somewhat closer to Zambia's capacity to import. Since 1986, increased capital inflows and higher copper prices have enabled Zambia to increase imports in real terms and as a percentage of GDP.

51 -38- alem 2i1 PnaaiumtIN Pofe zaft Z 's KmnorL 140 I~~~~~~~~~~~~~~ PUrfMIN WP=r 2.7 Copper production WIl steaddly from 1978 urnltdhe mid-1980 befr stabilizig at abou 65 pereat of thie volumes achieved in the mid-1970s (Figur 2.3). Ihis was paredy because miw dwpits bad become less accessible at greater depthis and overuden to ore ratios had iweae in open-pk mining. Moreover, corporawe eanings of ZCCM were insufficiento cover revsm_ in spare parts and maintenace, largey due to excessive spendf on non-mining bus_es. Foreign exchange allocations were also inadequate, and acceleraing domestic inflation incrased ZCCM's local costs faste than the Kwacha value of output. On top of tbat, stanads of technical middle _magemen fell as the Zmin program, was unduly accelerated. In recen yew.s copper prices have improved somnwht, but production volumes have not. Copper prices deflated by the import Unit value (MUV GS) are shown in Fipwz 2.4 including our base case projections. Ihe hig prices of the late 60s and early 70s seem td be the exception, and the price recovery in recent years is uno td be only partal. 2.8 Nnt do jorssuffered from years of official neglect because of thle early dominance of copper exports. New exports were anyway discouraged by an overvalued exchange rate, fixed agrcultural producer prices, the dominance of parastatals in production, and excessive regulaion ad licensing. Even when copper revenues began filing, little serious effort was made to diversify exports, because the decline was thougbt to be temporary. Tbus, non-traditional exports remnained a low and relatively constant share of total exports, fluctuating mostly with commodity price boonms.

53 Before 1983, there was no discernlble relationship between the read effective exchange rate and the value of non-traditional exports (Figure 2.5). lbis s, not suwprisingiven the overvaluation of the Kwacha and extensive use of price controls (especially In sgricultre). After 1983, there was a new (more realistic) exchange rate regime (see Annex A), and a relaxation of the foreign exchange constraint and export licensing. As a result, the performance of non-traditional exports improved. For example, during the depreciadon of , non-traditional exports shot up dramatically. Econometic analysis suggests a strong correlation with the real exchange rate since This bodes well for the future supply response of exports when other constraints to export development, such as infrasructure and financing, are reduced Recent develomnents In exporls. Zambia's exports continue to be dominated by copper. In the late 1980s there was a recovery in copper prices, and the value of copper exports increased 30.7 percent a year in Even so, Zambia was not able to take full advantage of the higher prices, party because production steadily declined as a result of shortages of spares and transport problems. However, cobalt prices and export volumes increased between 1989 and Figure 2S: E chang Rab and Non-Traditfi aluow X bet do*. e r 4 ftv-vo%*14r6 _ 2.11 Increases in non-traditional exports have been helped by the streamlining of export licensing and regulation since Moreover, the export retention scheme has improved access to foreign exchange, with a more favorabl exporters' exchange rate. Since 1985, there has been an increase in capacit utilization in some m ring eti wh export markets, and new enterprises have sprung up, notably in horticulture and floriculture. Between 1988 and 1991, non-traditional exports grew at 15.2 percent a year, and their share of total exports rose from 6.2 percent in 1988 to 10.9 percent by Althoug high growth rates pardy reflect low starting points, the fastest growing exports were food processing and primary agricultural commodities which seem to be responding to the improved incentives in agriculture (see Annex B).

54 -41- C. imuor 2.12 Zambia's domestc production has been highly dependet on Imported inputs. This was a direct result of the tariff reime introduced after Independence to support importsubstituting industrialization which required large amounts of capital and intermediat imports. Moreover, failure to adjust the fixed exchange rae in the face of domestic Inflation and large terms of trade declines meant the Kwacha was increasingly overvalued and imports were artiffcially cheap. Finally, buoyant copper revenues over a long period created a perception that declines in copper prices were temporary and thus there was no immediate need to adjust import demand downwards. Over time, however, there has been significant Import compression in absolute terms, as a share of output, and relative to other sub-saharan African countries While Zambia's import-gdp ratio was higher than the average for Sub-Saharan Africa in 1970, it fell sharply after the copper price bust in 1975 which reduced Zambia's capacity to import (Figure 2.6). Despite some increase between 1979 and 1981 as copper prices picked up, Zambia has consistently had a lower import-gdp ratio than the rest of Africa since the mid 1970s, and it is no longer exceptionally high compared to countries of similar size. With the rest of Africa, Zambia has seen a decline in imports relative to output since Because the exchange rate did not adjust to clear the market for imports, much of the compression was achieved through stringent and inefficient import licensing and foreign exchange allocations. The actual level of the exchange rate was not a significant detmiant of overall imports.][/ By 1982, imports were 50 percent of 1975 imports in real terms, with the decrease coming primarily at the expense of consumer goods imports. However, imports of intermediate inputs and capital goods also fetl sharply, resulting in lower capacity utilization and a deterioration In plant and equipment. Since 1989, however, increasing donor inflows in support of the new economic reform program have contributed to an upturn in imports The decline in import availability reduced but did not preclude output growth. In , imports fell by 2.1 percent a year, wbile output grew by 1.2 percent. Thus, annual output growth exceeded import growth by roughly 3.3 percent, and the long-run composite elasticity was negative (-1.75). How did GDP grow? First, increased scarcity of foreign exchange forced the government to cut a lot of M fat" and (probably) also forced private firms to use imports more efficiendy. Second, emphasizingrowth through agriculture in the 1980s meant less import-dependent growth for the economy Although the statistical correlation betwn imports and GDP growth is weak, that does not imply that import availability is unimportant for future growth. Zambia has already reduced its import-gdp ratio below the average for the Sub-Saharan Africa, and there may not be much more fat to be cut from imports. Moreover, investment, which is inevitably import-intensive, will have to be raised to accelerate growth. Thus, even If agriculture and other local rerorcbased sectrs are the fastest growing in the fwture, availability of foreign exchange is likely to be an increasingly important constraint on fture economic growth. I/ EPimaton of mpoit ctionshowed that the bst spificaion was a foreipaexcan consied model (Hemphil tpe). EsB y, the lrel of aged rseves and forign excha ddomined the level of impots.

55 -42- Figure 2.6: Copv motd ao.>.~f ^ Chang in Zambla's Import slructure. AS a result of Zambia's Inustrial policyof import substituion, and te tariff structure which supported it, imports of consuwmer goods fell faser arter 1975 thian imports of intermediate or capital goods. Because of thie high protection enjoyed by domestic consmer goods, imtports of such goods declined (notably in food and textiles) and domestic production increased. 2/ EBy contas, thiere were lower tariffs on capital goo4'i. The effc of taiffs on intreia iprts, however, is to harde to inepe bcue of thie more differentiated taiff protecion In 1970, capital anld intermediate goods imports togeter were 66 percent of all imports; by 1985, they were 82 percent (Fable 1.6). Along with increase domestic production of consumer goods, this suggests that there was some import substuion. Thiis resulted in many Zinfant Industries whicb could never compete intentoaly. In 1985, the World Dankc estimatd the domestic resource costs of Zambian firms; many were extremely inefficient and net users of foreign exchange. Moreover, the tariff structure and import liccmslng regime, which supported import substitution, made it difficulto import consumer goods and encouraged rent-eeking. Even so, the recor,dedecline in consumer goods may be 2/ BspeOiauy durng the seoond half of th sample period, smuggling was wdspand; dierebre, offia tae ~~~~~~~~oame sh _oftota Imofit god.

56 -43- ovestatd. High twiff may have led to increased under-invoicing and ncreased the Incentive to smuggle, and so reduced the official share more than the actual share Rema In 1mpnm. After a brief period of increed imports durlog the ady auction piod of , impot cmpsd agan during (most of) 1987 and I part tbis was due to the breakdown of the World Bank and IMF-suppore programs in 1987, resulting from the accumulation of debt service arrears to both the Fund and the Bank.jQI Stardng in 1989, the Tmproved avauabuity and allocation of foreig excbange through donor support and increased metal earnings allowed impor to resume their increase. Demand remained strong despite continued exchange rate depreciations from 1988 onwards Imports of mer Ms have recovered since 1990, due basically to exogenous factors such as the growth in maize imports and incr ases in oil prices. Imports of nia g=wg have fluctuated in recent years. Overall, however, there has been a big increase, both as a share of all imports and relative to historicalevels,.11/ suggesting that producers quicidy took advantage of increased availability of foreign exchange to rehabilitate plant and equipment. Imports of intermediate inputs. however, have fallen, possibly due to more efficient use of inputs after tariff nationalization; changes in production methods; and a fail in production Sede Acount, Until 1985, non-factor services accounted for a bigger part of the services deficithan did interest payments. Non-factor payments for freight and insurance, as well as spending on Zambian missions abroad, were the major items. Becase Zambia is landlocked, transportation cost are extremely high. Indeed, they may rouinely add between percent of import value to import costs. 21 With the accumation of foreign debt and declining GDP, however, factor payments are now the main reason for the services deficit. Interest payments exceeded receipts throughout , though by significandy more during the 1980s, reflecting the increasing extenad debt overhang lnanmcng th cumt acunt. Most bance of paymets financing of the current account deficits descnbed above came from public sector external debt, (Figure 2.7). Extnal debt doubled between 1970 and 1975, from US$654 million to US$1.26 billion, and continued to increase until 1987, before levelling off. After 1974, the government also drew down reserves; between 1970 and 1980 reserves fell from 8.3 to 1.2 months of imports. Arres were a significant source of external financing as early as 1975, but grew sharply starting In 1985, as macroeconomic imbalances worsened. JI , th govemut made a uniaei dcision to rsict ddbt-servioe payments to a oelig of 10 poeon t of aa Orip exchang erings. fl Capit goods impos wcsod most drmacay durin auction period in Bank of Zmbia: Baanoo of Paymes Dvisio.

58 Debt accumulation accelrated most In , padtcuarly for multilateral and bilat debt (iu 2.8). Be e 1970 and 1978, al debt grw rtv y slowly. From 1978 to 1987, long-tem debt almost tripled from US$1.6 billion to US$4.4 billion, mang Zambia on of the most highly indebtd countries in the wold relative to the siz of its eonomy. Declining creditworthiness and inring arrears led to a reduction in exposure by commercial banks from 1980 onwards, although ta was offst by increased official leading. en, in 1987, Zambia unilaterally declared a ceilng on debtservice payments. External funds dried up, exten debt disbursements fell, and arrears began to accumulate. With the re-introduction of marconomic reforms (and clearing of some arrars) in 1989, disbursement picked up, and debt accumulatdod increased gradually It appears that borrowings were increased to try to mainin Import capadty in the face of a declining real value of copper exports. In the early 1980s. when both copper prices and production fell sharply and world inrest rates rose, Zambia mor tan tripled the annual net borrowings at current prices (Fable 2.4). Even so, thi was Isfficient to maintain re purchasing power. By the lat 1980s when it was evdent ta borrowing was no the aswer to the decline in Zambia's copper revenues, net borrowigs fell significanty. Tabl 2.4: SamuaadJutarnaLIhmiu ombm MmO-m (5 years) (4 yrs) (4 yu) 87 (3 (5 yeas). ~= m Curt g (Assl A Copwr Revs (Difrmw frm baso perod) (-116) (+162) (-280) (+160) Boowing Total Remenue p brrwng c omn 1990 rbz (As0al ut Copper Raaos (-1373) (-1454) (-2143) (-1865) (Diflece from bas pekod) Tota Revenuplb borowng SoW CSO and Wodd Bank It Deolator - 0 MUV Index. PNodas badly correspond to fuctaton in copper revee.

59 -46- Trends In Composition of Debt Stock o.e~~~~~c-- Pr f fk a Multilatel + Ulietewel * O_olal btrke A 0th_ private 2.26 _, In 1985 and 1986, capital inflows increased becaus of agreemen on a Fund program, the introduction of a market-based foreign exchange auction, and the Paris Club rescheduling of US$570 million in principal and interest. In 1987, Zambia abandoned that macroeconomic program and declared a unilateral ceiling on external interest payments. Tlis was set at 10 pecent of export earnings less priority payment for oil, fertilizer, ZCCM, and the IATA bills for Zambia Airways. Because of this (and the accumulated arrsan to the Bank and Fund), all new lending and disbursemens were suspended by the Fund and Bank to Zambia. 'Mere was a sharp decline, too, in diburments by officw and private creditors, down by 38 percent and 76 percent, respectively, in Although a few loans were converted into gras by some bilateral donors, outstanding debt increase due mainly to arrears accumulation. Zambia's total debt stock fell slightly in 1989, however, as it reduced commercia pipeline wears and indebtedness to bilateraleaders. In addition, Zambia normalized relations with the Bank in March 1991, after clearing over US$300 million in debt service arrears to the Bank, and adopted an economic program informally monitored by the Fund staff. Zambia's access to assistance and rescheduling has also been substantially improved by its reclassification from a middle Income country to a least developed and debt-distressed country In 1990, Zambia's external debt position improved. This was due to increased copper earnings and Paris Club rescheduling of bilateral debt. Then Zambia cleared US$319 million in afreas to the Bank, which resumed lending in March Arrears to other lenders also fell by more than US$400 million. Normalization was, however, shordived. With political

60 -47- uncertaint and failure to implement agreed-upon policy reforms, a planned September tranche release was delayed, donor disbursements dried up, new debt service arres developed, and Bank disbursements were suspended once again in September In October 1991, a newly elected government implemented wide-ranging economic reforms, and Bank disbursements reumed in January Zambia's interest payments due on outstanding debt averaged about US$120 million annually from 1986 to 1991, a situation which will be eased somewhat over the next few years due to the July 1992 Paris Club agreements which provided debt relief for Zombiaes biateral official debt on enhanced Toronto terms. lhe net effect will be to reduce debt servicing obligations for by about US$900 million Despite debt restructrng, the balance-of-payments situation is likely to remain tight. Even given optimistic real growth of non-traditional exports, Zambia will require considerable new money annually, some of which will be as loans. llus, even with GDP growth of more than 5 percent a year, the debt to GDP ratio will remindisturbigly high (see Chaptes and 6). Tablek 2.: Indk of Cra'db e (,per cent) lf- X Tota DebtJONP W/ Tota DOWExpot. _W InteoGNP g/ Intereatlports Debt Seioe/EB"s di4i ft= Word Dank Debtor Repoing Service. of Total eatenaul debt (includes shott-term debt). h/ EWots of goods and servies (including worker rauma). ti Total inte paymet includmg on aho-term debt. 4/ Total Debt Sevice defined as acued obligaios inoluding arrears to be repad Credi ness. Zambian commercial debt is curnty trading at about 10 cents to the dollar in the secondary market, indicating that the finac markets have litle confidence in Zambia's abilty to service debt. The markets are probably right. Ihe debt burden, measured by debt-to-export ratios, debt4o-gnp ratios or per capita debt, shows an increasing burden from the mid-1970s to the mid-1980s (Fable 2.5). While the debt service and interstto-exports ratio appear lower between 1987 and 1990, this is due to the ceiling that Zambia placed on debt servicing; scbedule debt service was actually much higher Future outlook, Zambia's options for a debt stratw are limited by the large share of official debt which is either multilateral or post cut-off date Paris Club, neither of which can be rescheduled. Given its limited maneuverability, the government has worked hard towards rationalizing its debt stucture in the past year. The Pas aub of July 1992 will reduce the resources going into debt service payment over the next three years by

61 -48- about US$900 milion. For no aris Club bilateral debt (mosty Eatern European, MWddle Eatern and Russian loans) which Is not being seviced and which Is trading at a large dbicount, the Govement coud initi a buy-bacw. It 8 already investiating a lnerchl d& buy-back. Although that wil not provide mueb debt sesvic relief (since the governmet 1s paying very litde), caing the debt could help resore creditworthiess, as well as improving access to short-term suppliers' and odier trade crodit. Fbtur borrowing, however, Is unlikely to include much from this source. With respect to the dls, the Banks share of debt service will decline somewhat as the blend changes from IBRD to IDA. At the end of the rightw acumlaton prgram in 1995, the Fund component of debt is likely to be conveted puty Into ESAF tms. Nevertheless, ultltateralh wi ootinue to be an Imporant part of the debt overhang. E. External Sector Polidez Instead of allowing the exchange rte to adjust to market clearing levels, trade policy over most of the past 20 years has focussed on extensive import licensing and foreig exchange controls in response to fluctuations in copper price earnings. The resulting foreign exchange allocation was increasingly administered, which distorted incentives, reduced allocativefficiency, and enoouraged ren-seeking. Witb declining terms of trade and rising nfation, Zambia's exchange rate was inasingly overvalued, which wse a disincentive to developing non-ditional exports. And the tariff stcu rnforced the incendves toward highly capital- and import-intensive production In the mid-1980s, there were reforms in the exchag rate, the foreign exchange allocation system, and the tariff structur. By 1987, these refrms bad stalled, and many policies were reversed. Reforms wero renewed In 1989 and, especially in the exchange rate and foreign exchange, have continued to imptove since Tbe discussion below is orgized as follows: the exchange rtue nkl and m _numm section fouses on the different exchango rate regimes, quantifies the loss in the Kwacha's competitiveness, and analyzes trends in real and nominal exchange rates. In the impon licensing section, attenion is focussed on the impact of the different regimes on the allocation of foreign exchange and on the evolution of tariff reform. Filly, in the last section, the role of the exchange rate, licensing regulations, and the overl lam s~uuct is evaluated. Rc ndationsfr future policy changes are discussed in Chapter 4. F. engf Rate Plv and anagumt 2.35 Since Indepondence, there have been several exchange rate regimes in Zambia, but nearly all resulted In considerable overvaluation of the Kwacha (Table 2.6). Between 1970 and 1983, the cumulative change in the official exchange rate was only 20 percent. In the face of dterioting terms of trade and rising inflation, the increingly overvalued exchange rate did not accurately reflecthe scarcky of foreign exchange. The auction pedod (from October 1985-Decomber 1986), when the Kwacha was market-determined, was the only time since the early 1970s that the currency apeared to be in equilibrium. Recesy, however, exchange me policy and managemn have Improved considerably. An export retention market was introduced, allowing new traditional exporters to receive a market determined price for foreign exchange, and an Open General Licene (OGL) was introduced, covering an increasing share of impors. In hite 1992, a Bureaux de Chngo System pernittod open

62 -49- buying and selling for almost all legal purposes, within a limit of $2000. In December 1992, the official rate (used for ZCCM, debt service, direct government purchase, and the OGL) was merged with the already market determined export retention and Bureaux de change rates, largely eliminating the black market premium in Zambia The Ziambian Kwacha has been seriously overvalued for most of the past twenty years, but the extent of overvaluation depends on the measure used. The second half of the 1970s was nmrked by terms of trade declines, current account deteriorations, and the introduction of stringent import and exchange controls in Zambia, all of which indirectly support the hypothesis that the Kwacha was overvalued. Table 2.6 presents some more quantitative estimates of the extent of the overvaluation. The nominal exchange rate (Kwachas/US$) is shown in Column I of the table. The other columns in the table show that the rate has not moved rapidly enough to keep import prices in line with domestic prices, or to match changes in Zambia's capacity to import ErcThsint pg= adi-x. 'Me simplest measure of the Kwacha's loss (or gain) in competitiveness is movements in the real effective exchange rate. This tracks the nominal exchange rate compared to Zambia's inflation rate relative to inflation among its main trading partners. The base year is 1970, when the current account was in surplus, reserves were ample, and import tariffs were relatively low (Table 2.6). Since 1970, prices Zambia have increased much faster than those of its trading partners.j4/ This contrasts with slight increases in the nominal exchange rate for most of The purchasing power parity rate (Column 4) shows what the exchange rate would have been had it kept pace with relative inflation. Overvaluation became more serious in the mid-1980s, as seen by increasing real appreciation of the effective exchange rate.ui It worsened with the return to fixed exchange rates after 1987, due to rising inflation in Zambia relative to its trading partners Terms of Trade Adjusted Exchange Rate. Overvaluation is even more serious than the purchasing power rate suggests, however, because of the reduction in Zambia's capacity to import. If the exchange rate had been market-determined, it would have increased even faster than relative inflation. The "equilibrium" exchange rate is the nominal exchange rate adjusted both for inflation differentials and for the deteriorating terms of trade J1/ 13/ Purchasing Power Pty (PPP) is not an exact measuue of overvaluation of a currency by itself. In particular, it toes not take into consideration changes in the country's teams of trade and foreign exchange position. 14/ The CPI for industrial countries is taken as a proxy for Zambia's trading partners. See also Note Unless otherwise stated, the following terminology is used in descrbing exchange rate movements i.e. an increase (decrease) in the exchnge rate index reflects a depreciadion (appreoiation) of the kwacha. 16/ The nominal "equilibrium* exchange raes were assumed to be 0.71 in 1970 and 7.79 in Their corresponding real values were obtained by multiplying thn by the rlatve price index (using import weights). This yielded the real exchange rates. Using these two esties and the three-year moving average terms of trade variable, an elasicity of exchange rate movements with respect to the thre-year moving average was obtaind. This was then used to calla the intervening values of the equilbrium real exchang rate. One problem which has not boee resolved is what the appropriate import weights are. They have prbably not been staic over time beoause Zmbia's btding pauts have changed. For example as Zambia started tmading with more PTA countries, the reative price index

63 -so- (Column 6). The extent of overvaluation is clearly higher, and the problem started earlier than was suggested by the purchasing power parity rate. If the exchange rate is accepted to have been in equilibrium in 1970, then by the terms-of-trade adjusted exchange rate, the Kwacha was still overvalued in Table 2.6: Exo oft (1970=100) (1) (2) (3) (4) (5) (6) (7) Nominal Nominal Retve PPP Rate 3-Yea TOT- TOT excoh Exchang Pries (IUS) MA Tems Adjused Adjusted rat (IrS) Rat ((US) CPIJCPI, (1)'(3) of Trad nomina rea ab 1970= =100 (P.P.) ex rate mae _ ~~~~~~(7)/(3) _ S S Source: IFS 1992 Yearbook, CSO (ormts of Trade), staff estimates Bla Market Jium. A third measure of the overvaluation of the Kwacha is dhe difference between the official and the black market exchange rates. Although, the black market rate would not look as bad (.e. it would overeswm the incae in Zamba's prie relative to its tading pafmns) snce t PrA cntrs have igher inflaton a the indusl counties. This weake would explan why even in 1985 and 1986, the aal kwa at appens underad compard to the oquilibium euchang ate weights.

64 -Siis not an accurate indication of what the equilibrium rate would be, Wi/It does give primafacke evidence that the prevailing exchange rate is inappropriate. In Zambia, the premium is extremely sesitive to terms of trade shocks and an active exchange rat policy was succeful in reducing the premium (Figure 2.9). from 1972 to 1974, the premium fell as demand for foreign asses increased In response td the favorable copper prices. Conversely, copper price declines (and the mainent ce of a fixed exchange rate) in 1971 and 1974 resulted In an inreased premium in and The switch to a more active exchange rat policy, stating in 1976, resulted In a steady decline In the premium up to 1984, when the oollapse of an IMF program helped increase It again in late 1984 and During the first haf of the zark*tdetermined auction, the premium fell markedly, but the second half was marked by speculative behavior and increasing variability. Moreover, official intervention from mid-1986 on caused a divergence from the market rate, and the premium increased for the year a whole. When the auction was finally abandoned In early 1987, the premium increased substantially. Then, the return to a more frequently adjusted exchange rate induced a decline in the premium (see Annex A, Box A.1). Figure 2.10 shows the *real* exchange rate (adjusted for relative inflation rates but not terms of trade). It shows considerable appreciation in the early 1980s, movement toward a market clearing rate during the auction, the appreciation when Zambia abandoned the auction In 1987, and gradual imwovement in recent years despite high inflation. The govenment's current active management of the exchange rate has reduced the extent of overvaluation and improved the Kwacha's competitiveness. Figure 2.9 Exchange Rate Premium Premium of black market over official Cbesd 00 1*mI At an No 140 soy4 121 lmm blck ma*et exchange ria is influed by economic varibe mo as the bade policy regime and buds deficib, a well as by naws, eonomic agent' ex_ctns, and disadva of bdng ila.

66 G. him Rpaton Taiff were the primary mem of regulating imports in Zambia up to The regim had two main featu: widely ranging nominal tariffs from zero to 150 percent, and nmrous exemptionsuch that many itm entered free of duty. Thus, effective protection was extremely high and vaiable averaging 162 percent, but ranging from -22 percent to more ta 1200 percent for ividual tradeables. Effective protection was lowest for capital goods and heavy intermediates and negative for food products, agricultural and industrial machinery (see World Bank 1984). After 1975, non-price considerations became increasingly important in allocating imports, and the tariff structure in became less meaningful In assessing the acta prtection accorde different products and sub-sectors IThe taiff collection rado has generally been low because of numerous exemptions as well as smuggng (Figure 2.11).,l/ Since 1983, however, customs duties (and import taxes) have been Increasing relative to imports, perhaps pardy explained by the relaxation of import licensing in More recendy, the compression of the tariff schedule, the Introducton of the import license levy, and increased import sales tax may have driven the ratio up. Better customs administration and better duty compliance because of the Introduction f presipment inspection by the Societe Generale de Surveillance (SOS) may have also conbuted to the increasing ratio. Nonetheless, the phenomenon of increasing collections is diturbing because a tax on imports, especially on capital and intermediate goods, Is also a tax on exports. It would be better for the efficiency of resource allocation if a less distorng source of revenue could gradually reduce the reliance on tariffs. The value added tax now under consiation might be one answer rm *T Initial tariff restructuing (supported by the Bank's Industrial tation Projec in 1985) included lowering the maximum rate from 150 percen to 100 pt and imposig a minimum 10 percent on some of the items previously duty-free. In Januamy 1986, the number of duty-free items was further reduced and the minimum was raised from 10 percen to 15 percent. Many tariffs also became ad iorgm. A year later, the average tariff was increased as a result of increases in the import sales tax to reduce import demand Moreover an 'upliftw factor was applied to the fob price of imports to approximate wholesale margins in order to calculate the sales tax. This (and a 5 percent import license fee) fiuther ireased the effective tax on imports. Ihere were, however, still many exemption, which not only resulted in revenue loss but reduced transparency. Although there were some policy reversals In mid-1987 (when Zambia abandoned the Bank and Fund supported refrm program), tariff reform has proceeded steadily since In particular, progress has been made in reducing the diesion of the schedule and the level of tariff prtecton. Less headway has been made, however, in reducing the value of exemptions, and the number of extra taxes and levies In the 1991 budget, the number of different rates was reduced to six and new miniwmum and maximum rates were set at 15 percent and 50 percent, respectively. This reduced the dispersion in the schedule and improved transparency. Te number of ecemptions was decreased, but because some of the remaining duty-free goods had a high IV Deied athe ratd o of impot duty vnes to the value of imports. Collctdon rados at the sub-so loev hsve not boon obtained.

67 -54- import value (for example, oil) the revenue loss was still significan. Further reforms dud be made aftr a careil revenue and protection analysis. A better idea is noeeded of the effectdve protection stuure, given the linkages between production and imports, bore designing firther changes in the structure. Trends In Tariff Collection 23 C..~(a PWV-sWag "* , 43 S't 44 p ', / I ~~~~~~!~~~~~~~ 2.44 Importaxes, the single most imporant source of revenue, accounted for 30.8 percen of (non-grant) government revenue in / Tle collection ratio was only 10.4 percent, less than half the statutory tariff rate of 26 percent, due mainly to exempons and poor customs admndstaion. Most remaining items with a zero tariff rate are items which are either considered 'essential' or are governed by internaional exemption laws to which Zambia is a co-signatory. They include crude oil, fertilizer, maize, newsprint, and bools. Most of the remaining rates are either 20, 30, or 40 percen. Applicable duties and levies on imports are as follows: (a) C ui. These are ad valorem on the c.i.f. value of imports and range from zero percen to 100 percent, with most falling in the perent range. A few luxury Itms en at 100 percent. A sample survey covering the first six months of 1992 showed ihat a disturbingly large percentage of Import (27.8 percent) were exempt from duty. (b)!idlfl factr. This increases the tax base on which the import sales tax is applied by multiplying the post-duty import value by an uplift factor of 1.2. Its economic justification factor is to raise the base of the import tax to a level J2l hnpos ax hee rer to the pot se tax, customs dutie, and th impot cense loq.

68 -55- which corresponds to the domesic price of localy produced substwi plus the cost of wholesaling because the sles tax on dometc production is oft applied aftr the wholesale margin is applied. (c) hnse. The import ses a unfm surcharge of 20 perct on all dudable items; if a good is exempt from tariff,, It is generaly exempt from sales tax. CTbe 1993 budget speech announced that the sales tax on domestic producton was to be harmonized with the Import sales tax.) (d) b np. Importers have to pay a 10 percent license fee if they Importhrugh either the OGL or retention markets. The fee is levied on the c.i.f. import value. (The 1993 budget speech announced that this would be discontinued.) 2.45 As a result of these tariffs and levies, the e f f is much higher than the average stautry tariff would indicate C(able 2.7).;Q/ The average satutory tariff of 26 percent would correspond to an effective tax rate of 56.2 percent. The effectve maximum tax rate (duty and sales tax) is 148 percent instead of to0 perce, whbe die minmum is 43 percent, not 15 percent. Tabe 2.7: Import Taxes Cusoms duty import sad ta ffece tx rate (%) (%) ) &ur Zambian authoities, ff estutes is Zambia has had a mtnber of very differe foreign exchange allocation system over the years, most of which have Involved a great deal of adminitrive discretion. A brief description of these systems can be found in Annex A. There are three ways to obtain foreign exchange - through the OGL market, export retention fumds, or the Bureaux de Change. 22 Th effotive tjx ra(t) is calaoed as: T- t + (u*(oif + t)p, whv t the duq rat, a tih upl hator, and s represnt thde es tax.

69 Opn General Ucense (OGL) Imports. Essential imports (etroleum, ferfilizer and ZCCM purchases abroad), are paid for by the government at the official rate. The private sector uses the retention market, the OGL and (since September 1992) the Bureaux de Change. At the outset in 1990, only about 10 percent of base period imports were eligible to enter through the OGL (see Annex A). There were at that time two rates (or windows) for foreign exchange. Since most imports came in through the first window, there was always an excess demand for foreign exchange there. The second window (the OL) operated on a restricted positive list and expanded as the supply of foreign exchange increased. Even when tfie two windows were unified in early 1991, ZCCM earnings were still generally reserved for ZCCM's import requirements plus the debt service, fertilizer and crude oil imports and other foreign exchange requirements of the GRZ. The OGL was gradually liberalized, with a less restrictive positive list but most "luxury' goods were excluded. By January 1992, roughly 90 percent of base period imports were eligible for OGL; by September 1992, that had risen to 95 percent and was converted to a negative list basis The OGL is being streamlined. Documentation has been reduced and now an intermediary (a commercial bank) can be used, which has helped cut through red tape. Even so, an importer still has to present an import license, SGS pre-shipment certification, pro forma invoices for all imports worth more than $100,000 in value, tax clearance certificate, application for forex, and the issuance of a letter of credit (LJC). These procedures can be expensive and time-consuming In 1992, the average funds available to the OGL was roughly $5.2 million per week. Delays in approval and disbursements can still occur while importers familiarize themselves with changes in documentation required by the Bank of Zambia and because of delays in donor disbursements. Such delays, varying from four to 10 weeks, can be costly for importers. Funds are tied up because they often must deposit the Kwacha befbre applying for the license. In some cases, importers tie up funds in other ways because uncertainty about when allocations will be actually received causes them to hold exceptionally large inventories of input supplies ImDorts using retention funds. This market was about a fifth the size of the OGL in 1991 but has been increasing. From May 1991, the administration of the -cheme, as well as the issuing of combined forex/import licenses and the SOS Report of Clean Findings, have been managed by commercial banks. The move from 50 percent to 100 percent retention rate in February 1992 and the transfer of some service account transactions from the OGL in March has increased the market. In 1992, about $140 million worth of transactions may have taken place, including both the amount retained by exporters and the amount resold. Imports purchased with retention funds are subject to the same short negative list as the OGL, most importandy, vehicles in "finished/assembled form", televisions, and VCRs. Documentation is less demanding than the OGL, but more cumbersome tha.n to the black market. Government reduced the time an exporter can hold export proceeds before surrender from 180 to 30 days which has eroded the value of this scheme to many exporters, 2.51 "No funds" imports. This is a quasi-legalization of the parallel market. In November 1990, a small negative list was introduced, different from (and shorter than) the

70 -57- one for the retention market.21/ This however, is not a real barrier to imports. In mid- 1991, the import license requirement for "no-funds" imports was discontinued, and it became more difficult to keep track of market transactions. In August 1991, all *no-fund" imports were subject to pre-shipment Inspection by SGS for imports exceeding $15,000. In , when Import licenses were still required, transactions in this market were $80 million to $100 million a year. Between August 1991 and August 1992, when SGS started pre-shipment inspection, only $7 million was recorded. This suggests that there is stiul a considerable amount of smuggling and under-invoicing of imports. Clearly, the absence of admnistrative controls and documentation requirements and lower transactions costs outweigh the fact that a sizable premium (perhaps 10 percent) still exists over both the official and retention exchange rates. H. Export Regulations Bnd Incentives 2.52 Until the mid-1980s, non-traditional were exports largely Ignored in Zambia. Price declines in copper were viewed by the government as temporary, and the normal response to the scarcity of foreign exchange was to borrow money, increase exchange controls, and apply more stringent import licensing. The incentive structure facing exporters was determined by various industrial development acts, the duty drawback scheme, exchange rate policy, access to foreign exchange, and export financing arrangements. Export promotion in the 1970s and early 1980s depended heavily on administered systems, such as the dut drawack scheme and other rebate programs, which were cumbersome and generally ineffective. In addition, myriad exprt liin luamen and the anti-export bias created by the existence of highiyorotected import substituting industries did not help increase exports. By far the biggest disincentive to exporters, however, was the overvaluation of the Kwacha Introduced in 1984 by the Bank of Zambia, the exmr don schem has been one of the most effective and popular incentives to non-traditional exporters and has been significandy liberalized since Its inception. Until recently, it enabled non-traditional exporters to retain gross export foreign exchange earnings 180 days, provided they were used for import requirements. This was shortened to 30 eays in early In February 1992, the retention rate was raised to 100 percent. On average, 6.6 percent of exports were eligible for retention from since it is not available for metal exports. Additional foreign transactions in the services account were shifted to the retention market In June Exporters say that the scheme is attractive because It enables the eoure to acqirs foreign exchange with which imported inputs can be purchased. It usually takes only 5-7 working days to obtain forex, as against 3-5 weeks from the OGL. Transactions costs are, however, still significant. Many firms which had previously produced solely for the domestic market have turned to exporting; other have increased their export share of production. Between 1987 and 1990, non-traditional exports (mostly agricultural products) increased from US$75 million to US$113 million, and rose as a share of exports Ruaty environmnt. Export promotion has been primarily governed by various Industrial Acts. Until recendy, however, these were unsuccessful La e to poor design and the unfavorable macroeconomic situation. The Industrial Development Act (1977), which ZI/ The negative list consists mostly of pteciou stones and mimerals (viz. gold, siver, and platinum, as wel as jewelry) and of item prohibited for reasons of national seoury e.g. guns, weapons, and ammnition.

71 -58- replaced the Pioneer Industries Act, was intended to create incentves for m ng exporters by biter alia, exemption from duties and taxes on imported inputs and machinery, tax breaks, and making import licenses easier to obtain. The Act was ineetve. Much discretion was still exercised by the Ministry of Commerce, Tnde and Industry througb export licenses and numerous discretionary exemptions on the duty side. Moreover, the overvaluation of the Kwacha (by reducing export profitabiity) more than offset the concessions, and tbere were delays in approval. By omtng any explicit incentives for laborintensive techniques (and given low real interest rates), the Act also encouaged capitalinensive productimn at the expense of domestic labor. Given the lack of a domesti captal goods market in Zambia and the shortage of foreign exchange, it Is not suwprising that manuftring exports did not respond. Between , they stayed at less than 2 percent of all exports In 1986, the Industrial Act was repealed and replaced by the Industriavement Act of Its aim was to promote and atract new private investment by both domestic residents and foreigners. Among the key intended incentives for egrs were: simplification of the duty drawback system; streamlining of the export licensing system; and establishment of a more viable institutional export promotion board. None appear to have had much success in attracdng new Investors or non-traditional exporters. 72/ The tepid response Is not surprisin given the policy reversals and uncertainty following the termination of the auction in mid In 1991, the Act was revised to make foreign investment more attractive for investors to invest in Zambia, and a new Investment Code was introduced. There was stonger emphasis on support for the g sector and clearer articulation of new and generous incentives for private inestors. Apart from fiscal and other common incentives for all investors, exporters were given proflt remitances of up to 70 percent in the first year and 60 percenthereafter, and an export revolving fund was created. As of August 1992, 174 licenses had been approved, leading to at least US$500 million promised by new foreign investors. Some of these plan to export. 23/ Many came from the neighboring countries and much of investment is in agricultur and agro-industries. However, the new act threatened to be expensive and to put existing business at a competitive disadvantage. May argued that having fair, moderate and uniform taxes and tariffs would be a better long-term incentive. A new act is now being drafted emphasizing those principles Export taxes and fial Incntves for exportoriented Invesmts Taxes on mining revenues have always been a major source of government revenue, but not taxes on non-metal exports. The only exportax which appears to be a major disincentive to nontraditional exporters is the 20 percent exportax on gemstones dealers, which has farther reduced the nunbers of dealers in the official market, and is to be phased out While both the Investment Acts of 1977 and 1986 included general tax concessions, it is unclear whether many exporters took advantage of them. Various tariff reforms were also intended to reduce costs of imported inputs. Export subsidies are not significant in the trade regime and would not be appropriate given that countervailing duties can now be imposed under the GAIT. V/ Mm list of m*or non-me!t expoting firms aso not cnwd significaney sine Wf Some.: hgmait Cem Docni.

72 Exp. Before 1990, export licensing was cumbersome and timeconsuming. Various licenses and permits were required for export, and approval had to be given by different (often several) government agencies, depending on the particular export. Export licensing was meant to support the policy of import-substitution, by encouraging producers to first sell to the domestic market before exporting. In 1990, procedures were streamlined and licensing decentraized. Exporters no longer had to obtain approval from any government agencies or ministries, except for 48 Items on the negative list. In March 1991, this process was further liberalized, and the list of restricted exports was whitded down to four (petroleum, fertilizer, ivory, and white maize.)?wl All export licenses can now be obtained from the exporter's commercial bank where a letter of credit is involved. Moreover, a single export declaration form has been introduced to replace the previos exchange control forms and customs exports bills of entry. This simpliflcation saves exporters time and reduces their costs %a drawa. Duty drawbacks have long existed to provide duty rebates on imported raw materw for all manufacturers. Because the system is complex and unweildy, however, it has rarely been used by exporters. As part of the 1985 reforms, the individual drawback rates were to be replaced with average sectoral drawbacks for eligible nontraditional exporters, but this has not happened and the system, as administered by the Customs Departnent, is still unsatisfactory. Hardly any fims take advantage of it; from 1991 to mid-year 1992, only tw companies claimed duty drawback. The high costs of completing the multiplicity of forms, dealing with instltutions, and the delays in obtaining the rebate more than offset the rebate. Centralization (with one institution wholly responsible for providing the rebate) and simplified procedures will be crucial in making the scheme quicker and more effecdve. in himded 2.61 In the past few years, some large textile manufacturers have invested warehousm. Under this arrangement, firms import inputs free of duty which are placed under seal at the warehouse. These are open for Customs inspection at any time, and the goods are released periodically by Customs as required by the manufacturer. Firms with bonded warehousesay they are satisfied with the arrangement. Smaller firms may soon be able to benefitoo, by renting warehouse space from larger companies.2j/ One problem, however, is that bond schemes can only be effectively operated from a facility devoted solely to exporting. They offer no incentive to exports from factories which also sell on the domestic market. One answer is an advance license scheme which permits registered exporters to import inputs duty free against export orders, as Zambia already bas for packaging for horticulture and floricultural exports. Uniti the adminidere duty drawback scheme can be made effective, more emphasis may need to be placed on in-bond manufacturing, advance licensing and other schemes to minimize the imported input costs faced by exporters. Another option under consideration in Zambia is export processing zones (EPZs), although these have had mixed results in stimulating exports in other developing countries. If Zambia introduces an EPZ, Livingstone would appear to be a sensible location since it is the closest customs entry point in to the southern transport routes.?/ Due to the drought in 1992, al varieties of maize i.e. including yellow, have been tempoaruily put on the negative list. 21 The mission found t cams in which larger manufactures were buuding wa_ous much lar than their own needs for the purpose of fiture leasing.

73 -60-1, Eo Fl=dng 2.62 Export financing Is weak in the areas of trade and term financing. In addition, the lack of export credit insurance makes exporting on credit riskier. Institutions have not encouraged existing or potential exporters due to poor management and the macroeconomic situation Develomt flnk of mia (DBZU. DBZ is a corporation established by an Act of Parliament in 1972 and owned by the Government, public institutions, foreign banks, and international institutions, including the African Development Bank (ADB). Its main objectives are to mobilize resources and provide medium and long-term loans and equity financing to projects in all sectors of the economy, emphasizing export-oriented or labor-intensive projects in agriculture, agro-industry, transport, engineering and construction, as well as projects based on local raw materials. DBZ has been characterized by sound and effective management, qualified and professional staff and considerable autonomy in investment decision making. Until the mid-eighties, its sizable portfolio performed well. In 1987, however, DBZ's performance worsened, and it became highly leveraged. This was a result of Zambia's poor creditworthiness due to its repudiation of the IMP/World Bank economic reform program, a generally poor macroeconomic environment, and tight domestic credit. Moreover, successive devaluations after 1983 increased Kwacha liabilities on foreign currency loans, and consequently, it became harder for DBZ to mnobilize resources. Nor has the Bank been very successful in directing its lending to exportin firms. A 1989 World Bank review showed that only 3 out of 22 firms supported by an IBRD loan to DBZ were exporters. In fact, most of its lending has gone to firms that were net foreign exchange users The lack of any viable term-financing institution in Zambia is a serious constraint to the development of new exports and needs to be rectified - through a restructured DBZ or an entirely new institution. Either way, there are some prerequisites for success. First, it should have the highest autonomy possible so that lending decisions can be made objectively. Second, outside participation can provide professional expertise. Third, a stable macroeconomic environment is crucial to maintaining a healthy portfolio and profitability. Fourth, non-payment risk can be reduced by having export earnings of the borrower go directly into an escrow account, which could then be used to repay the loan. Finally, foreign direct investment can be important in providing capital and expertise, given the absence of large-scale term financing Export-Import (EXIM1 Bank. The Zambia Export-Import Bank was established in 1987 to provide foreign exchange financing of project costs and inputs for export-oriented companies, trade financing, and trade support services. It has been unable to fulfill these objectives, however, because of poor and indifferent management and an inability to raise funds. It is not clear that there is a meaningfil and distinct role for EXIM Bank. In the medium-term as the macroeconomic environment stabilizes, commercial banks will be better equipped and willing to provide trade finance; in many cases, they already are. Possible solutions include transferring EXIM bank's functions to other financial institutions, either DBZ or the Zambia National Commercial Bank (ZNCB), and dissolving the bank Export credit insurance. Zambia State Insurance Corporation (ZSIC) offers cargo insurance from warehouse to warehouse, but there is no insurance for exporters who want to extend credit for their overseas purchasers, often to trading partners in the Preferential Trade Area (PTA) who are strapped for cash. In addition, there is no payment guarantee credit

74 -61- system, and this increases the risk of exporting. Because there are no laws which prohibit credit insurance, however, its absence implies that the exports involved may be too risky Export,Boad ot Zambia (MBZM. Established in 1986, the board's role is to help develop non-traditional exports through market research supporto exportets; disemin g information on Zambian exports through trade fairs, etc.; organizing training programs for penetration of export markets; and recommending policies to achive its goals. Potential and actual exporteis have a mixed view of the Export Board's effectiveness. Some say that they did not find it particulady useful. On the other hand, EBZ's main contribution may be Its role as a conduit between the prv;ate sector and the goverment as a sort of deliberation council. The private sector ha;.-ys been well-represented on the Board, and the semirs where the Board's annual surv, discussed provide a forum for the private sector to express its views to the government.26/ EBZ also provides useful services in Its statistical database, its annual survey and report on the performance of non-traditional exporters, and in organizing trade fairs and donor seminars. A revolving fund for the imports of essenti inputs into exports was established in 1990 with the help of a Swedish trading company, AB Sukab. The fund is operated jointly by the Board and the Zambia National Commercial Bank but it it is too small (US$250,OO) to satisfy exporters' demand.2w 2.68 Other obstal to eots Even with a reduction in the anti-export bias and improved export incentives, non-traditional export still face difficuldties in exporing because of the inadequacy of physical infrastructure, notably telecommunications and transport. Telecommunications (cable, telephone, facsimile, and telex) can be erratic. This adds to business costs and is an especially potent constraint for exporters, who need to have ready access to the rest of the world. Zambia's location as a landlocked country and (untffl recendy) political instability along many of its expert transport routes have resulted in delays and higb costs of international transport.2&/ Moreover, maintaining a natonal airline and proecting it from competition have resulted in high air freight charges and unreliable service by Zambia Airways. (In 1991, the combination of these bigh charges and inadequate storage space caused many horticultural and floricultural firms to fold.) On top of that, uncerainty about delivery of inputs causes fims to hold larger inventories than they otherwise would, thereby tying up financial resources. 2 At the last sinair in August 1992, both the Bank of Zambia and the Ministuy of Commeor, Trde and Industry we rpresetaed. 7/ 'Me Lome IV E1pwot D c_eopment Progamme is proposing an export revolving fund of about US$S million. 2 It is estmated th freight and insuance routiney add 20-22% to the woat of imports.

75 -62- ill 3.1 Since the mid-1970s, Zambis per-cpts, natonal Income and ts social Indicar have fllen dratically. For th aeg ZaMblan lving standards have been fatl for. more 20 years. The drp In Z s national outpu, whic determines long4um prspects for national income was no less startling; and Ivestme, which8 wa partilary buoyant In (if not paicularly efficen) when copper ort boomed, tun down shaply after the 1970s. 3.2 In the 1960 and early 1970s, Zambia. made is in income, li1 epec y, school enrolmet and reduced malnuion and infnt mortaity. Between 1975 ad 1990, thos povmet salled, d In some ases wero rvered (see Tabl 3.1). Real f1ma sector eaigs dwindled to a mmre 25 percet of tir 1975 lovd. Mhe declin I per-capita incm pushd more people below tbhe poty l; ad by 1991, 67 prcent of Zemblans lived in povety, as compared to a estmed 60 percent In Inome Iquaies did narrow betwoee 1974 and 1991, but that was due more to a shrp dedine for the hwhrpaid tha any mpwrvemt for te low-paid. 3.3 Bedw the Povwty Un. perc of Zambian hoselwd l ving in povarty, already hg In the 1970s. Increased with economic den, especlly in ua arnm. Becas the qult of data since 1970 vaies ermously, It Is hard to com up Wit a consistey meanlngm income-based povery line. Hower, k I possle to conct a food bask ed povey line. 3.4 Based on the cos of a nu onally adequate food bat (marked up by costs for non-food ite), the povey line was es ed at 49 Kwaca per housdhld adh month in tolatig the costs to 1991 usig t CPI ad compngt itto 1991 oicomes dhws a sronger Increase in urban than rur poverq in the Between 1975 d 1991, te percenta of rura holds with income beow the food-baskt povert lin rose fom 51 to 54 perent, but in ura arm it soared from 4 to 43 percelqi Usg a 1987 food baset estmd by the Prces ad inms Commission (with a lower caoy conte) stfi left 42 prcen of the urb populatin In povety In W 2/ 15,564 calos per month fw family of 6, with 2 edubs and 4 obdu. 2W 11 margi of arr in do udb p_hetni lar, oa Ui 1974 dat m band ony a L_ah, Ndta mm ay Caro Grakam, '91 PM. Of md nvoa in ou Cme- DudIqnp Nmoo,. Apri 1991.

77 Aother poverty line was used in the priority survey of For various reasons, dds poverty line cannot be used for other years. Even so, it broadly confirm the finding based on the food-basket poverty line. 7Te (priority survey) poverty line was taken as an Income of K1380 (per adult equivalent) a month. The extremely poor were those with an income less than K962 - the *core" poverty line - and moderaly poor were those above the "core" line but below the poverty line. In November 1991, 67.4 percent of all households were poor (that is, below the poverty line), and 58 percent were extremely poor (rable 3.2). This is much worse than the rest of Sub-Saharan Africa, where 47 percent of households were poor, and 30 percent extremely poor../ Of rural households, 81 percent were poor and 75 percent extremely poor..i/ In urban households, 47 percent lived in poverty, and 36 percen in extreme poverty (able 3.2). Table 3.2: mimjh&nand RIinL venyjadkaiwm i! URBAN RURAL ;SS Mean Monthly lnoome (Kwaca) Median Monthly Income (ICwacha) Poverty Line (Kwacha) core Poveaty Line (Kwaoha) Moderately Poor (% of Households) Modeatdely Poor (% of Total) Extrmely Poor (% of Households) Extremely Poor (% of Total) Source: Priority Survey Income Equaizaton. Economic decline has equalized income differences in Zambia, both overall and between urban and ural areas. In , the poorest 20 percent of the populafon earned 3 percent of all income, whereas the richest 20 percent earned World Bank, World Develooment Renort. 1990, p. 29. The figures for Sub-Saharn Afhica refer to li Note that the accounting for osmption of own producion is not done satisfactoy in the Priority Survey data, and therefore the data may oveestmat thea ten of povaty in rud areas. An indicator of this is the fact that according to this daa he core poor only spent 58.8 percent of thdir income on oo, while the modaste poor spend 63.5 percent and the wanpoor 60.1 pern asd on the d and a filler poverty deternant snalysis an estimate for auto_onmpn will be developed and the numbera adjusted. These rults od available for the final version of this repot

78 -65- percent, and the richest 5 percet earned 25 percent of all icome. In mral areas, the poort 20 pecent earned 4 percent of to rurd income, while the poorest 20 pert in urban aras ened 6 perent of urban income. Per-capita nru Incom was K74 a month, MI less ta a th of the 255 In ura areas. Rural newqualty was a high as urban Inqualty (both with a Gini coefficient of 0.48), but the lar gap between avea ur and rura Incomes resulted In an overall Gui coefficint of 0.59 in wich Is high by internat tral s. Data for 1959 show an overall Gni coefficient of 0.48, & suggesng t the rapid growth In the 1960s and early 1970s made Income distution less oquail. 3.7 In 1985, the pooret 25 percent in urban areas eamed only 3.1 percent of au income, compaed to 7.1 percent in ; the second poort 25 perent, however, increase their suhr from 12.1 percent In to 18.1 percent in 1985, whereas the top half saw only minor declinesw3l Ihs result was an urban income GOni codicient about the same as In but the rural coofficien fell to 0.42 fl, indicating a more equa income 3.8 Inqaity betwen uran and rura are has dimished: avenge rura expendi was more ta half that of urban areas in 1991, wheres in 1975 average rua Income was only 30 percent of urban income. The sam trends can be observed for the median hcome in u relba ive to rural areas. The GIni coefficients for rura and urban exendre disibutions are similr in 1991, as opposed to big dhferences i the 197S inom Gini coeficients. The decrease In inequwity is probably due to the compression in wages over The income diubuton in te informal sector is more skewed in the forma sector.ft In 1980, forma sector employment w almost 24 pecent of the labor force, but this had decined to under 10 percent by 1990 (Table 3.3). In 1986, 85 percent of Ifomal employment was located in the mral are, 392 compared to only 35 percent of formal sector employment. The participation of women in the Ifrmal sctor is high; comprising 53.6 percen of informal sector employment, compared to only 15.4 percent of the fonnal workforce. Wom predominany hwe lower-paying jobs in the informal sector, espei y in subsistence fming. a# So= uadwtozdn of own podued _osumpon wa signalled n the publication of the prnary Mull. IF no, Nawlng the Gap; Planing for a8i Nee& and Produettve Emoymnnt in Zam, Add Abaa Jury I977, p MI Mor daled deta fo 198 ar t avaible. fl Patoe, RMdhm, Food Conumptioad A4 199O, p. 6. MI CSO. &1emin loiui n.d LusAka, 1992, p.5. eat In Zambia, FAod Suis gu. Wskiung No. 2 I2/ PIC, Uka, Lua August M191.

79 -66- Table 3.3 LsbEroe and formal Sectr fmohvment Fomal Employment Labor Force Fommal Employment As % of Labor YEAR 1'000) ('0000) Force Soume:a Economic Rep"rt, NCDP. Various Issues 3.10 Sic th mid-1970s, th gains In soca indicators have been partaly reversed, and recent dat poit towards a substatal decline, in line with the oveal dedine In income (se Table 3.1). After peaking in 1980, life epectancy has been decining over th 1980s, but less so fr women than for mel Infint mortity, after rching a low of 97 per 1000 in 1980 QW has been Increasig over the 1980s. Child mortaity rate rose from 72.3 in 1980 to 93.8 in 1992, as have the rates for mateal mortality. ifiant Imation covera ro strongly until 1987, but a decline has set In sice Child maliton J dipped from 20 percet in 1970 to a low of 6 percet in 1980, but has since risen to over 20 pee i 1992, and may have deteirated even firther under the influence of the drought. Tbe stg of childre below the age of S - a good indiator of long-term deprivation from adequae nuition - jumped in rural areas from 38 percen in to 54 percent in 1990, nearly twice the rate of counties lie Namlba, Zimbabwe and Lesot. 42/ The percentage of children hospitalized for malnutrition that 9/ Ibe offcial fisu of 97 see sonwt out of line with vaious ater repor, but wu chosen to low for compuiliy witht 1991 M gre. IV P_enta of chde wder the dve weih for age, minus two times he standad dovwan ga Cogil B., and M. ZDa, goo of the Nutrition Module as wt of th Cro Foreuatn SurveyY. nl Z CSO, NFNC, awd UNICEF, Luaa M 1990; the 1970 figuri Ia nomplel comparble with th I980 me, but he wau coonlude what *... twenq yeas of can ad develomet hav not reuld hi my percepimptuveans in he nurmia stau of chdn livig i nal area.'

80 67- died in h hospital 4I rose from 11.8 In 1973 to 22 In 1982 and 40.3 In 1989, equally ilndicatg an aggravation of malnutrition. MI he decline in Zambis social indicators over the 1980s has broughthem In line with dtose of other low-income counries. Lffe epctcy (Fgure 3.1), in6t moraity (igure 3.2), and school enrollmentlgure 3.3) are now comparble to those of other low-incomeconomies, where Zambia used to outerform most of its peers in the seventies and eady eighties. Ihe past efforts In education still pay off in better than predicted iiteracy rates, both for women and men, but Zambias relatively strong position in literacy Is likely to be lost if current conditios prevail in the education sector Primary school enrollment ratios grew until 1985, after which a decline set in. The decline in education standards may have stated earlier, and is only patially reflected in enrollment data, because over the 1980s enrollment was kept high by doubling and tripling shft, thus reducing the hours of education per student. IlLeacy rates stil benefit from the increase in access to education achieved in the seventes, and declined over from 36.2 to 24.3 percent, down from 49,6 percent in Women have icraingly closed the gap in enrollment In summary, access to basic social services deteriorateduring the fiscal crunch of the 1980s, aggravating the decline in health and nutrition status among the poor and undermining education quality. Reduced access coincided with a higher impact of disease and manutition due to the increase in poverty and higher demand for social services due to population growth that increased to an amnal rate of 3.2 percent over the years of economic decline. Continued rural-urban migration put extra pressure on the urban infrastructure, yielding recurrent outbreals of cholera and dysentery, and putting added preure on an increasingly inefficient and ieffective urban health system. J jy Abo know as the aw hfta rt. UMNICEP, Siuation of Anysis of Women and Children in Zambia. UNICEP and GRZ, 1986; WHO, Stl: ADMet=ic Nuttt Iors, WHO Nutriion Unit, Gea 1989 (Update). g

84 -71- C. lad 3.16 The decline in income was coupled with an crease in population growth - from 2.7 percent in 1960 to 3.2 percent in the 1980s. Although there is no conclusive proof, economic decline may Induce a greater desire for more children to supply a social safety net. However, higher population gtowth increases the dependency ratos (the ratio of people outside the economically actve age groups divided by the nber in these groups) and Zambia has a comparadvely high ratio of 1.06, up from.91 in High population growth also mea a reltively young population, with high demand for social services. In 1990, there were 2.2 million school age d ren in Zambia, and births per year wer 385,000. Adding to population presures was the rapid ubnization. The urban population she rose from 23 percent in 1960 to 42 percent In 1990, which disproportionately in the demand for inefficient and underfunded) social sevices, such as water, saniation, and health caro, as e rik of infectous diseases increases due to overcrowding. According to the 1991 Pioriy Survey, only 19 percent of the poor have access to piped water (56 percent for the non-poor); and 12 percent have access to flush toilets, (38 percent of tho non-poor). D. Food Socitv 3.17 Child malition in Zambia is among the worst in Sub-Saharan Africa and, although the drought and economic decline are pardy responsible for the present situation, malntition in Zambia was high evea in the 1970s, and seems to have stuctr causes A large and growing number of Zambians canot obtain enough food to sutain physical and mental growth or needed physical activity (.e. food insecure). The causes are diverse and are frequently asociaed with inadequat stocks of food either nationally, regionally, seasonally, or with insufficient means to grow or purchase food. In ruwal areas, food insecurity appears to stem from low productivity - per hectare, or per farmer. Ihe Household Expendture and Income Survey (1991) shows that 70 pent of rural, and about 30 percent of urban, households have a monthly per-capita expendiue hat insufficiet to provide a nutritionally adequate diet even if all spending was on food (see Annex C) In urban areas, food Insecurity stems fom the familiar combination of low household incomes and high and/or widely fluchatig basic food prices, made wore for some urban families by the ending of the urban maize coupon program in late Widely regaded as inefficient, tils program, nonetheess, provided free about 25 percent of the monddy maize consumption of tens of thousands of urban households. Scrapping it may have been jusifed on economic and budgetary grounds, but was a major faor in increasing the risk of undernutrition for all but the wealthiest urban households According to techical advisors of the Meteorological Depant and World Meteorological Ornizatin (WMO), Zambia Ondeed, the whole of Eastern and Southe Africa) has seen a secular decline in rainl and a secur hrease in average daily teperature for more than 100 years. If true, this means hat the continued reliance on maize as Zambia's staple food has become an ncreasingly hazardous proposition, especialy In the mazgowing sohern and eastern regions. Given that maize accunt for wugly percent of daily caloric intake, any change in conditions which increase the risk of sub-normal production are cause for concern.

85 . FN ig -72- L Su p of Sodal SU The supply of soci services, In particular health care and education, has deteriorated with the general decline In goverament revenues, exacerbated by misallocation of nd inefficient allocation of government expendiures (see Chapter 6) Ihe economic decline, and pardcularly the reduced copper revenues in , sharply reduced government's capacity to supply public services, especially afer access to international capita markets became more difficutt in the early 1980s. In addition, donors became more reluctanto support Zambia after cs repeated noncompliance with agreed adjustmn programs. Hardly surping, thoe, that govement expenditures fell by 30 percent in real terms between 1984 and In allocation of expenditures, there are two major biases. The first is high spening on non-core sectors (such as industial subsidies and defence) which has reduced the share to several social sectors such as education; its share of the budget shrank from almost 17 percent in 1984 to below 9 percent in I9924./ Ihe second bias is high capial (imstead of recurent) spendig. This Is evident in students-per- book ratios of up to 20:1, and declining immuizaton ratios, due to lack of fuel to transport health workers Health spending has kept pace during budgetary declines, and sfill compares avorably to many low-income countries. However, inefficiency has produced outcomes not much different fom those of peer countries (see section Babone). This is partly due to the bias towards terdary care. Witne the share of spending for the Universty Teaching Hospital percent of all govermet health expditur in 1990, and rising. Inefficiency is compounded by an over-centralized system (Box 2.1). 141ema udd lwwbaa4piet e,tappolnrx..1ow!,*: bst~~~~~~~~~~~~~~.gu.x..s...:..>......,. ~ Q.-,-..-_>.'.' i Ni JlBhiMt1;ta T.s.;*;HM),K Uwtloh *,i ikog hi~s*t s;. oufmn tw p.?~ ~ ~ ~ ~~~ie4*bn~. E a I # ntidns ont= Sm.Wad ank RR' 16 *wimuuannm Iuw*s Mo. pqeb LfIi ci gi Soo: World 1Da er N. 1k9", Annex 1, September 199.

87 Poor households have higher depdency ratios (that is, the rado of old and young to working-g nembes of the family) thn non-poor - 93 percent, compared to 83 percen - and bigger averag famiies. Moreover, 34 perce of members of poor male households and 42 percen for femaleheaded households work; for non-poor households, the figures are 27 and 41 percent respectively Of those employed household members, 95 and 97 percen of poor male and female headed households, respectively, are self-employed or fimily workers. Only six percent of the poor live in "free housing" (t ion: urban squatter settlements); while 11 percent of the no-poor are provided with housing, (mainy civil servants). G. and the _Ad Poor 3.31 Sustined reduction in poverty depends on improving the human capital of the poor - bette education, health and mntrition and population - and making more productive use of it. Ibe latter requires appropri macroeconomic adjusunent policies that reduce biases against the reward for the poor's most import asset Its labor and iceased access of the poor to factors of producton, such as capital and land. Together with the right incentives for savirp and Invesment, adjustment policies can be a powerfiul tool for equitable growth Short-Run Impact of Adjutment. Stabilization and adjustent policies wil have a negative impact on the poor in the short-run; and expected growth in wui not match the rapidly risng population. The poor are more vulnerable becaue lack of human and physic capital impedes quick adjustment on the supply side (switching to other sctors and o) and increaes the Impact on the demand side (the poor hwve fewer asses to deplete for consumtion). With stabilization and adjustment, economiconaction is almost Inevitable In the short-run, as people and capital are reallocated among the sectors of the eownomy in reaction to a new set of relative prices. Transitional unemployment is likely to resutk from the reallocation of resources Imprvements in rural terms of trade do not necesarily make all furmers better off, dth knefficifet subsistence farmer on marginaland may be worse off due to increases In agrcultural input prces.4/ More generally, rural inequalities are likely to inease. Real hiter rates wil likely be higher if inflation is controlled; that will hit agricultural producers more than odher borrowers, because their borrowing is dictated by seasona growing patterns. Adjustment of demand to new relative prices will take time, more so if supply reactions are hampered by ineffective reforms, or are limited by existig market strmcrs. lhe urban poor depend more on marketed goods than the rural poor, and are therefore more vulnerable to adjustme that involves changing relaive prices The real exchange rate depreciation wiul hit producers of non-tradables more than toe of tradables. Many non-tradables producers are in the urban informal sector, which aloady has a strongly skewed income distribution, and contains many people below the poverty line. A real exchange rate depreciation also makes imported products more expensive. Some of these products (drugs, leaning materials) are Inputs for the social secos for which I Saha, David L and Alanr Saud, "Stural Austmet and Ihe Welfre of Rmrl SmahLdcz: A Comptive Analysis fiom Sub-S Aharn- W Jk. fhmi Volm 5, No2, MaLy Mm ulicl shw ha, i only prie efft ae tken nt sacont, h Income position of to rua amomlldar usaly wonens n me of strucral a4ustmnt

88 -75- no domestic substitute exists, and as a result, the costs of providing social services could rise in the short run, although rapid tariff reforms may counteract such increases. The planned fiscal contraction also puts pressure on public social spending, even though its share in the budget is planned to rise. Ihe maize subsidies were among the first expenditures to be strongly reduced, but a worldng alternative to this inefficient welfare program was not yet developed at the time of subsidy reduction. One positive effect of adjustment policies, however, is the increased aid flows to Zambia, which will at least partially benefit the poor in the short run Iong-Run Impact of Adjustment. A successful adjustment program would (in the long run) reverse the negative trends for the poor, as structural bias%.. against the poor are removed: (i) (ii) (iii) (iv) A liberalization of prices will in principle reduce discrimination against the output of rural areas, still the center of poverty in Zambia. However, income effects for the rural poor wil depend on additional factors, such as reform in the land laws and development of more efficient rural credit mechanisms. The adjustment of the economy will increase labor productivity, Increasing the level of wages. In general, a more labor-intensive growth path can be expected, as capital - for those who had access to cheap foreign exchange - was kept inexpensive in the past, thereby reducing labor demand. Privatization of parastatals and financial sector liberalization wiul increase access to capital for the poor. Ihe supply of capital in general will increase, as the privileged access of the parastatals is curtailed. Increased revenue for a more efficient government will bring more resources in the stated priority sectors of education and health care. Efficiency enhancing reforms in the health and education sectors would increase both output and quality of services (see Chapter 6). EL Copjne with Poverty 3.37 To mitigate the effects of adjustment on the poor, the Govermment announced several measures at the outset of the program. Others were already in place Social Action Progm. In 1990, the Zambian Government presented its Social Action Program to the donor community. This contained a description of problems and issues in the social sectors, with an annexed list of project proposals. Unfortunately, the list was a mix of projects that were already in the investment program, some that were recurrent cost financing, some existing donor programs, and some rejected by donors. Priorities were not clear, and projects were not targeted to the vulnerable or the poor. Furthermore, there were no plans or ideas about implementation In the last half of 1990, a structure for implementation of the Social Action Program was agreed by donors and Government. Working groups (WGs) were established for each sector chaired by the relevant line agency (often a ministry) and including representatives from relevant Government agencies, an NGO, and donors (a lead donor agency and a backup). The WGs were to analyze the needs in the sector and discuss additions to the

89 -76- inestme progam ta would help ase te pligt of the poor duing adjustmet. The WGs reported to a Sten Committee chaired by NCDP, which was supposed to set out the genera directio for the SAP. Howvenr, the terms of bref fir the WOs were ever clear, and there wero unold meti but lile inrov mp 3.40 The Govemen has ner given dt SAP an m pl astructun;a BC-faded coordintor had no counterpart for 18 months and retred fom his post at the end of SAP fnds fom the Govenme the past two years' budget bave been largely dimrd but witiout any target or cler priorities. In may Instance, th funds allocatd by GRZ pr to have been used to gain political avor or to improve the wori condions of local officias Sodal Reovery Fund and Mleroprojecs UnIL ithe EC has been supportn microproject In Zania for severa yeats, fosing o sool rhabi on and epasn Although this prom is not directly reatd to the social aspet of adhtment, It does fll wuh a role. In lat 1990, the a asseed th possibilities of its involvmen in acivit reing to te social dimension of adjustmet It was clear that the SAP needed to un It own cours and that direct Bank assista was not appropriat. Istad, the Government askd the Bank to look at the EC experience and deveop a program that would provie support directy to communities and NGOs using a demand-dven, comm ty-based pproach. Jointly with the EC, the Bank developed fiancing for the Sodcal Rec Fund. Thi progam currnly covers about 300 projects, disbursing about $5 mlioan per year for high pioriy soci nastructure rehabilitation ye Public Wor. in the 1992 budget, KSOO millon was s aside for labor Intensive public work, but witt ay clea pi mechanism. If die Government had accpt cmmnity involvemet ( uh provisin of labor or meals or or forms of cos shing) and subjected such project to the clos mnioring peromd under the SRF/MPP thes fuds coud have been put to good use. I d, dtis money was given back in the supplementa budget, implicitly provid more financing for the mitay nd the forei sevice. The awaeness of existing progms and projeot in cental govement minstries seems to be poor Public Welfare Schem. In the 1992 budet, h Goverment alocatod Ki bmion to the Pubc Wdea Antc Scheme (PWAS) for the Iient poor, usig avis from the elimination of tle maize subsidy. This is one of the oldestoca progams in Zambia, but had been dormat for years before the 1991 a_ustment program and the 1992 drought. Agai no prison was made for administrative costs, but in ts cuae the responsibility for implemeng e program was alloced to the Minstry of Community Deopment and Socia Welfiar. In each district, a welfr comittee was fomed, encompassing both govemet and private groups. The commitees detmin who needs gram (macly In fom of fre maze). Tho gr ar supposed o go only to n-able bodle poor and those at tie bottom of the hinome distribution. Ihe Commitees ref those not eligible to oter progms, such as PUSH and the drough rl effors. Some Imp lnio difficui were r aeneh, d less than half of ihe allocated fuds wro dibursed. For 1993, the Governmt intends to scale down fundig of the PWAS in nomina torms, implying a real dedline. I F 1993, FiM n a NodNwayhjoid tho mm.

90 Drou Relief. Becuse of the seou drougt affectig the southen half of Zambia, about US$300 milo of maiz was Imported Ditrton of the maiz to tde poor was orgaized by the Progrm to Prevent Malntiton (PPM). his was led by a stg comte, chaed by thio Minister of Health with mmbbp from dors and odher Goverment agcs. In charge of maiz distrbtion, the PPM was managed by seconded Govemt staff under the leadehip of the World Food Progrm he PPM saet up loea (moody disret) commite (with several in the larger districts) comprising relwous, political, pvermen and private growups. Ihe committe organiz food for work programs to improv local Infrastructure. They alo detemin who is elgbo for free or subsidzed maize a1d who can buy maiz Th progrm appears to be well-run, and ad hoc visits showed iha it did nde reach most of the drought-sticken areas. 1h progra i to be etended to cover all of Zambia t wil be Impor to criy monitor the various ineventons to gain piences for futuro work rdatg to upstam, provendve measu. IDA, UNICEF, and the Govermen are presety suppoti such a dwught monitoring ererse Soal Scrty. Some socil seuy befts ex which prote only formal-sector empoy fom the consequences of old age and ilness. Mhe Misty of Labor ad Social Sert has the ovell coordiaion, and there are many Implementing agents.f - - is weak, snd enforcement of eniements is limited. S2/ 3.47 To Porl's Coping Stages. The poor dmselves have reacted in many ways to the eonomic tlsi and to th h inentives caused by adjustmen Theso coping str is have resuted not only in new ncome-gneratng actviies bee developed, but consum poer bave lso hned (see Table 3.6). Ml m ecivil SrA PensoM Tea WoWans Cogamn d; MmLA J4peuno Fun d; Thw Zamb National Providnt Fund; th Mtkua Pion Sche ;7he Zmba Slat hmunoe Cozpam an doi Soidal Scounty Scheme f poli L drs. bshol esehilly fw e wo a in pacdie lt posibit to aipioiui bfits eaed to tde dept ofa huband.

92 -79- PART I - PLOSPECT AND CHOICES IV. CURRENT DEVELOPMENTS AND POLICY ISSU 4.1 The previous chaptes have presented ample evidence that Zambia's economic policies over the 28 years since Independence have not been supportive of economic growth. Chapter 3 provided estmaes dat, had policies been more appropriate, domestic production in 1991 might have been almostwice as high as It actually was, even given the worsening in Zambia's tenms of trade. Substantial reforms have been made in recent years, especially after the October 1991 elections and the formation of a new government. The short-tem policy agenda of the Zambian Governmet is described in tl-e latest Policy Framework Paper, reviewed by the Bank in February Tis chapter describes briefly the major elements of that program in the context of iniating sustainable and equitable longer-term economic growth in Zambia. Chapter 5 then presents the economic scenarios and the assumptions on which they are based, and Chapter 6 discusse severalonger-term economic policy issues. 4.2 To achieve sustinable and equitableconomic growth, Zambia needs to promote private sector growth and a more efficient public sector. The first requirement of both of these will be to reduce inflation, and tht will require the Zambian government to live within its means. Beyond that, the major public sector issues wiul be privatizaon, public sector management (including wage policy), promotion of free and open markets, and provision of vital public services. A. her - 'm cbab= 4.3 In the short term, The most important economic reform is to contain inflaton. Markets In Zambia do not work well in periods of high inflation; long-run expectations become increasingly uncain, adding another disincentive for pote investors. Interest rates, even with no government limits, do not always keep pace wih inflation. Banks increasingly look to the security of collateral rather than the projected rate of return in evaluating requests for loans. Government is constantly tempted to itervene in price setting by parastatals or to restrain exchange rates to help contain inflation. And public sector unions seem able to win wage increase to take account of past inflation, making it all the moro difficulto bring down the prese rate. 4.4 The most important cause of inflation in Zmbia has been fiscal deficits. In some years, deficits have resulted from maize subsidies; in other years, it has been wage settlements. In 1992, subsidies to Zambia Airways played a major role. Unfortunately, there are no tricks, no technical soluions to this problem. The answer is clear and straightforward; government must live within its means. In the past, it has found it hard to stick to a tight budget, especially when extrnal events have forced changes in the budget during the year. Contaning the deficit will be easier, however, to the extent that the following suggestions are followed: (a) Don't kid yoursel. Budget deficits can be eiminated on paper at the start of the year by assuming dramatic but unlikely improvements, such as sharply

93 -80- Increasng tax collectio efficiency or zero wage increases.2y Unfortunaty, some of these may not be feasible politically, and some may be possible In theory but impossible to deliver on the ground. The rest of relying on unrealistic expectations is a rapidly increasing deficit, a sense that events are getting out of control, and a reduction In the governmet's ability and wllingpess to resist further inreas. (b) Look at the big ire. Decisions with budget consequences must not be take in isolation from the overall budget balnc issue. This means that the Minister of Fiance must have hbis chance to presenthe fiscal implications before decisions are taken. Some of the worst budgetary mischief in Zambia has takan place when the Mister of Finance has been out of town. Zambia ba paid dearly for those mistakes. For handling proposals with fiscal consequences during the year, a Treaury Committee of Cabinet could be established, chaired by the Minister of Finance, with the responsibility of reviewing all Cabinet proposals with significant budgetary or monetary impact and including the Committee's r mtions as pat of the Cabinet package. (c) ps cud. Every budget has a large contingency item. In Zambia's case, this is a place to put enough money for wage incase without having to say exactly how much they have provided, but additional amounts for nspecified and unanticipated needs should also be provided. Unfornateily, the amounts provided in recent years have not been sufficient, high levels of excepional spending have been approve during the year in excess of avallable revenues. Additional amounts for unspecified and unanticipaed needs should also be provided. Conservative revenue projections are another way to build in a less explicit (but still usefl) source of cogency funaing. (d) Hnan for the worst Some couties have divided spending spending, protected from all but the most severe revenue shortls, and "non core" spending, which can be adjusted more easily during the year if circumstane 0so require. Other countrie set priorie. Some have explicit contingency plans prepared In advance for various levels of expenditure reductions or revenue increases. However explicithe system, the general idea is that the Budget Office needs to have an idea of what it would do if it becomes necessary to cut spending or increase revenue by, say, 10 percent during the year. Just discontinuing capital spending and cuttg al non-wage recurrent spending by a fixed percentage may not be the most efficient way of doing it. ino -core" (e) S the _ In retrospect, some of the worsw budgetay disasters could have been foreseen (and avoided) If only the Ministry of Finance had made the right enquiries before the budget year started. In some cases, credit to gi ma is always the asumptio in fth publi budge since the amount asumed in the govements budget assumpos f was inreases is buried along with other Wime in do con_gey., The point beei. hat ovw_e dsol be ralio in t mount hy assume will be needed in their ind budget Pg.ns

94 -81- fa3mers was epected to return to govamet in the budget, but the farmers were unle or unwilling to pay. A parast dth has been coverig its los with oans (for ample, Zambia Airways) can be expected to eventually run out of credit and come to the budget Arars accumulat by ministrie at the end of one year can mean a high csh spending early In the xt. One cn new find all such sources of diwter, but the search should be thouwgh at possible. (f) G be I cnrl It Is vil that procdues for monitorng and contoling budgetary activies at all levels be improved, partiularly by. Individual mnisties. For examle, Th Budget Director needs a montly InratIon system providing data on the sc of government arears, additi o tt stock, and proposed payme of arears. Zambia's decsion to move to a cash basis In 1993, where deficit spending s not autmatically available to indhvidual ministries, should be a big help, provided It does not lead to an increase In arreas to local supplier that evenally have to be made good and pwvided the moniorn infation Is sufficieny tmely and accurae to permit budget officas to Identy pbems eary in *t prces. 43 One eaon for spe emphasis on reducing the fiscal defcit as the pdmay way to control ifaions the neod to ensure that the prvat sector has access to sufficit credit within th necessry monetary restaints. When tho fiscal limit Is exceeded, govement ib faced with a choice between letting the overal monetary limit be exceeded or cttg back rrher on prvato sector cedit, thus fauther delaying private secor recovery. 4.6 Achekin th fisca balance will mean efithr Icreasing revene or decreasing spending. On balance, the empha shoiud be on reduced spending. lhere is scope In eliminatng subsidies and conaining non-economic spending even while some areas, such as prmary education and health care, receive Increased allocation. However, most of the easy speding cuts have already been made, parclary in maiz wbdes. Asuming tha the budgetay Impact of input and output credit for the agricultural sector can be eliinate afte 1993, fiaher reduedo wil not be easy and wil not be large. Meanwhie, more sedn on vita public services and human resources would be deirable. Given the imponce of contaiing the deficit, thferfore, tax policy reforms that could sgnificantly recuce revenues dsud be avoided. Sich reforms should be at least revemne neutral, until inflation has been -b Iy reduced. Wage spending as a pcent of GDP sould not increase, but the aving from retrncment shud be used primarly to achieve a more apropriat salary struce for sled workers. 1nfast r ctue spendin needs to be incr, but most of that should be through chag and user fees, not the budgel Lecal auoites have a lqer scope for inra usr fees which should reduce the pressure for fiscal transfes frm the central government. On the revenue side, the emphasishold be on estblish a broader, more eficient reven system, based more on indirectaxes than income taxes. 4.7 The rest of the policy agenda can be divided inob te policies affecting primarily public and those polices (sdu of cours carre out by the publc sector) that anly relae to operations of the pdvate sector. Of course, au public sector acdvities afect the pdvate sector in some way, but it Is usefad to distngush between having a better public sector and havn better public sector rues for the prive secr.

95 Pivatzon sits In the middle of thes two categoies because t Involv movng an enis from public to prtivat ownerip. Zambia's prhvazatlon program Is ambitous. lbe Privat on Act, passed by Parliament in June 1992, sea up a quasid-autonomous agency with a mande to prvaiz a of the 150 commercially oriented parastatals with 10 yea. Ihero are to be no "sacred cows", Including ZCCM, the miing company curreny 60 percent owned by the Govenment 4.9 ITe major contribution of privadzation to economic growth is the Im e In m efficiency, not so much becae managers suddenly beome sm t but becas stoger incentives induce more efficient behavior. In Zambia, paratal managemet has filed to adapt to changn market signals and to shed excess opatng costs when ecessary. rivatizton can as Incree frign Investmen and ease of new entry. Some exstg busineses may be more attracve to investors dt stag a project from scratch. Moreover, privatzaton often entails breakig up of some enterprie as they pass to the private sector, which can help to break-up monopolies. D be Sector 4.10 Wthin the public sector, there are four broad areas of policy reform with a direct bearing on thef prospect for su nable growth: (i) partal reform - more efficient opraion of nonrivatiz p s, mostly public utlities; (H) public sector management - more efficient operaon of nonparta govement, emphsizing wage policy, training, and managemen system Oii) (iv) composition of spending - improving budget allocations across broad catories (wages vs. supplies) and across and within sectors; and extemal policies - extenual debt manageume and donor relations. mof a ware to 4.11 The important short-term policy reforms in the eliminate unnecemary inemediate organzations and to work towards comu mercialz Much of the elaborate machiney of parastatal management in Zambia can be simplified or scapped. Goverment has already decided to diminate interm- Hiate holding companies, such as INDECO. The umbrella parastatal management organizton, ZIMCO, is also being slimmed down and tunwed into an investment holding company that wjil provide information services, rather than serve as another layer of management decision making. Ths transidt will require firm guidance as elements witin ZIMCO will want to retain their ovedy Itrsi e practices. Many pastatals remaining in the public sector wil be de facto monopolies. For them, the government will need rues to permit freedom in day-tay management, while ensurig commerca pricing that wiul not be so low as to require subsides nor so high that it collects monopoly rents td offset excese opeafting cost In mining, the major short-term policy issue is openig it up to privat investment In general and to direct foreign inestment in partia. So far, legal and fiscal regimes, together with ZCCMs copper monopoly, have provided sttwg disinentives to private sector invem t in ming. The government now recognizes privat secor investment must be

96 413- the stmulus to mnain and expand mineral production in Zambia. Initial regulatoy refom Is already being undertakn Ti should result in a revised legal framework povidig grea security of tite to Investr within an equitable fiscal regime. At the sam time, Insituia capaciy buflding wil be required to ensure that the governm eles (such as the M y of Mnes and the Gological S;rvey) can to admster the sector on bealf of the Govennt while atacting pdvate investen A keyq isue in th. short tem will be establishig and implementiog a policy to attract private investment in opper mining. The rle of ZCCM will need clarifcation, as the stae decres Its paicipation in exiting opd8a d new projects Zmbia's public sector la the capacty to Implement mjr policy chages effectively and to deliver vitaly needed public goods and services. There are too many employees, paricuarly at lower levels; wages are well below those in the private sector for professional and skilled people; and the management systems do mot make the best use of even existing personnel. The government has made a st in addressing these problems and has adopted a far-reaching blic mtorms reform agenda. The focus should be on far more ta ment, but should stres developing a profesdonal cadre of public seran committ to seng public needs. Professionalzation wil require wage Increases for speior perfmance (made possible by chmen) and stong management system witin central and district ministries. Such effective system, in tn, mean improving hncentie for performance and better managemet informton sysm so that progms and bdges cam be monitored by senior staff. Improvements are also needed in communication and coordination Many of these changes well require incr training. short, the over needs to shift its focus fom providing employment to providing quality services Setting and keeping to a Di sector Wag oolicy wiul be crucial, both for acei fiscal blace and for Improving public sector efficiency. Ihis wm not be easy, espay if laton sqys high. It also requires the involvement of many non-government grups, cenly public sector unios, but also representatives of private sector workers and employers, both from the formal and infrmal sectors. Everybody bas a stake in keeping the public sector wago bi withn affordble limits. Everyone also has an interest in atacdng and keeping good wodrrs at all levels to improve the qualty of public services. Finally, wage notiation needs to be integrated more completely with the budget proes. Final decisoms must le with the Presiden and the Cabinet, but these decisionshould pass directly hrough (and be framed by) the Mnistry of Finance or by something like the Treasury Committee dissed above. The full Cabinet coud then assgn responsibuityto tlis committe for providing nsuction to the govenment's n tors. The Cabit Office may contnue as the primary point of contact with the unions, but the Mnistry of Fie o the Trasury Committee should be the major decision-maker overseeing those negotions and bruing the choices to the Cabinet 'The g fiflon.alpnbi spendlng In Zambia has been improving id recent years, but much more could be done. The emphasishould be on human resource development and infrastuctue, both vital to the resumption of private sector growth. Spending on the military, oversas reprnon, and subsidies to prutatals shoud be kept as low as posule so ta vit sernice (such as primary health, war an d sanitation, primay education, and road ) can be incres above thir present indequate leves. Reaocatin are also needed within sectors, for example, less of UTH and more for prmay health care; less for new roads, more for _ ; less for new lomotves, more for incrg effiiency of rau car usage. (See Chapter 6 moredetals on health and education

97 484- and the Bans Publc Expeodi Review, Gy Cover Report No ZA on other socons). No bou cut r eay. Almos al actvte havom raonale. But ths rnallons a est becao some pubflc servces are woeuly inadequate. U reallocations ae Impota for growth, too. Irucre vem es cadirectly cut mmsts to produes and c m, huls Icaing the of Za s businesse whflo reducing th cost of livg. In the longer-term, Zambas fure depends on a heathy and well educaed work foe. If that ca be aieved, the er will any stntla nea lng standard. The problem 1 that thes invesmn take time, which is all the more rea to start now to stop the erosion in human resources and to begin to show some Improvts. Such a tr-around would also be a boost to the political ac4eptablity of the progr Zambia may not be able to double per capka consumption quicldy, but it could mor easily make drmatc md visible vemes in the health and education status of the childrvn s would be an excllt pla to stat in diveraig the beft of economic reform C. Sdal flcg 4.16 I ilessentitht effecive programs be in place to rdiev the deprivatos of the vey poor and to prvide safety net for those advely affcted by eownomic cage and unable to ptct thmves. (see Capte 3) Ihe 8aL dlon mhram. (SAP), as an indede ivestmen program, shoud be scrawpped. Confused mesa and -y promises have creat expectation tht cannot be e. Inted, socidal developmet concens houd be reflected in the investamt progrm of centr and local governmt agencies. The workingrups set up under the SAP should contie but with a difet mandate. They have worked with varied success, chiefly depig on the b investm of the lead donor agency and the rlainship with resonsible Governm agency. he plan shodd be to allow similar groups to contne workig on medium and longer term strategy in the sectos. They could become a supprt group' for the line agency resposible, be a ounding board for new policy inative, and hdp review investment progms. h system of *leadonor' should be nainned td asst th Govanmet with It donor coordinaton responsibite Puble Work. Inbs_ INtead of making empty promises and reat unroalisidc e, the Govrment should allocate wateve finds i finds apoiate for such work to exist uni, for example PUSH or The Soci Recovery Fund/Micro Project Un If there are aspects of existg progrms that do not fit with new Government prioities, negotatons with donors and implementers sbould begi as a matter of urgency to emure that well-targeted, wel implemented, cost-effective projects can be undetaken widu saddling the Governme with a larger burmacracy IWhlc Weflfre AaIPhmIron. Ihe PPM has shown that the model followed by the Welhre Program, through localized tageting, is a feasible and reive cost-effectve way of rechig the poor. The consaint has beenthe wlack of consistent monioring ad surviso, both at drct and centralevel, and in the limited coordinati with other pr ms. Rlatvey minor insvin logistcal support would ly yield sy better impi Thbis progrm dshouid be protected from spending cuts and Is Ip _ cmkiprvd Xenti

98 The Goverment should usme preset focus on food suty becous of the recent drough to redirect donor and goverment funds to food security Interventin the medim and long mm Even when Zambia ws a t expor of od, household food secuit was poo, rstig In permnn, serious malnurition reatve to the nme of th county. Prodcing a stralig run (or b ) product or a bled of yellow and whe maize, should be carelly evaluated. his could be a smple and direct way of rching the poor through self-reg, as these products while qut nutitious a considered an infrior good by most conumem. Ti may be les successl now, bowever, becaus many more people developed a ts for yellow maiz thi pa year when dt was ofn al that was avalable. The PPM shoud be tansfrmed Ilto a morepm _ natin, ad welleted progm, servidg the whole country and implmnted joildy Wi the Social Wdefae Program A socal policy secert should be established in one of the contr agences (lning or Finamce), with three main funcdons: (1) to coordine and help develop social policies, focusing on such cross-sectoral issues as poverty, food seurity, AIDS, and women's Issues; M) to coordinate but not impleme actvities to addressuch ksu and to ensu the cnsn of interventios with global social development policies; and (3) to monitor and evaluate progrs In policy fomu, imp, and gl socia deveopment. Mm. t is not to collecthe iormation but to request collection of informaion f*om outie aencies (for example, the CSO) anid to analyze such data. There Is liklky to be strong Support among donors for such a secaalal Gnvement funding codd be rediected from exstig units in NCDP that are presenty nr' Ulilling their mandate At the moment, Zambia suffs from planning fati. Therefoe, it is imporanto ress that this wi not be a 'plannlg body' In the tadiional sen. Ihe job is m to alloca resources and develop daboreo plans, but to coordnate, developolicy guideli, monitor, and prvide Incentives. The secreta should report to a councl on soca polc r possby to the ste commifteo already set-up to monitor the adjustment program. In the short run, it is crucial to make soci deveopment and social safety net issus an integrl part of the reform imp n In the longer run, some sort of coumnc ought to be established with r _reenate from poliica parties, labor unions, pvae devlpnt acies (NMOs), reserchinstitutions l government and the civ servico to crate and debate, and focus th cour's tention on socia issues Zambias Food Security progms must be improved. In order to serously res d to this hug problem, such program will need to focus on: - diversification of producdon and consmpton away from maize towards more drought-tolerant cereas crops, such as sorghum &nd millet; - increasing employment and incom earning opportunities for the poorest and most food insecure households to help them buy the food they need; - Improvi the efficency of food maketing by enabling libralied ety Into food atr and tansport, as well as competion to m hin food price flcutos

99 46- - developing an approprla fiod security reserve, possibly for tie Souten Aica region, and peoaps of a smal strategic reseve to damp exceadve price swh4g i fitum drughts; - better target of food transr saety eto programs, provding food (andlor ernings qooruities) for those bouseholds without minimly dqu food production; and - reivigorating edffors to increase producdvity of ml der farming houseolds, parcularly in those provinc districts, and communities where surveys bh found high levels of mal and under-nutrti Food secuiy targedng efforts can only succeed in tandem with efforts to impve provision of basic services, particularly tho that improve hfamt and maten health. A the same time, ter should be a more vigorous efot to reduce population growth and mic programs to rais all eoonomic productvity in ways that, over time, signficanty improve Zambias quality of life Zambs economic refom program is predicated on dramatic Iove in the cimate for doing business. However, the creaon of the necessary enablig evioment for enhanced growth and produetivity continues to be hampered by inftasucture that is poorly utiized and sroly run-down. In transport, as In other srs, the past focus as been on buildig new I c rather than on rehabilitation and _. ReSts was predictabe A rece riew of the financial healt of the tansport sector esa at in 1991, roads, raiways, and the airline Imposed a financial burden of about K 4.9 billion (nerly USS100 millon) on the Govrnment in th form of grants, overdraft, and short-tm loans at gvemnt-owned bak with government guaraees. This was equivalent to about 12 pert of all current revems, xcludin grns Mm ilua]/ nenvodc includes both Zambia Railways (ZR) and the Tanzania Zambia Radlwas Autort (trazara). Zambia Railways was originally dovoloped to help exploration of copper and zinc reserves in central and northern Zambia While ZR is stm Imtn to the ming industry, TAZARA prvides the shortst rout to the sea from the copper belt and ZCCM. The high tariffs and iciewy of ZR ha"ve rulted In diesion of freight to tucs but It sti moves a wide ne of imports and has the pote o transport inassed Ional exports Goveent is concere about the financi burden imposed by ZR, and a pzt of the lr parastata reform program, has set a goal for Its financi sdf-sufficiency. Losses in , however, reached K440 million (US$15 mfllion), and this understates the true loss beas ZR has not been savicng its debt, assets have not been revalued, and depreciation is inadequate. Likewise TAZARA, which carie mainly Zambian tast taffic, I unable to recover oost or to meet debt-servic oblgations; accordiy goverment i exploring optons for creaig a separate management company to run TAZARA's Zambian operations The pefoma of ZR wl only improve if it is radicaly reruc ed. In so doing, ZR needs to fmcus on its core freight business and to put a halt to such non-railway actives

100 87- ass8 pro-cast concret factories and quarries. While the overriding objective would be for ZR to achieve a rea return on capital employed of, say 15 percent, pecific targets includ recatuig market share (tough mors rdeiabwi and redued asit dmes), impwovs producivity of staff and reou (and so rducing the payroll), and mangemt deveopme Ahieving specific targets in thes key areas would involve making maximum use of private contacto in Ifrastbuctreabilitation and maitenac; pivatzig or leang the main worksop, maitace depots, and some track; reducing the asset base; and developing more efficient opering and management sytm Zambia's m are impotn nationassets with an estimad replacement cost (ess the bacog of defred ) of almost US$2 billion. Of this, nearly US$1.S billion (about 21,000 kn) fa under the jursdiction of the Roads Department (RD) in the Ministry of Works and Supply (MWS), and the rmainig US$0.5 bilion (about 16,000 kn) come under nine udb and 48 rral District Councils. Whle etnsmive, the network is in poor condion after years of neglct. Intaional trunk routes bave been kept In acceptable condion rgely with donor fuds), but the domestic network is In poor shape and sometmes mpssible, aspecialy in rur areas and In the rainy season. Ithe poor state of the roads not oily incres trnst costs for exstig and emerging busine, but also inhibi agicultural development by making access to markets difficult SpendIng on roads is well below that needed to maintain the network. Current spending covers only percent of the mantennee needed for the 7,000 km of tunk and main roads, and only percent of the 14,000 km of rura district roads. Moreover, the flow of funds is confused, and reipients of those fnds are not held accountable for tteir effective use. Existi regulaon, which date back to 1969 (with minor in 1974), also fail to refect best practices and polcies, and serve to utain indequate Ins ons. The roles of the tree msies with responsbility for roads - (the Misy of mmuicaions ad Tr t (MCI), MWS (including RD), and tie Ministry of Local Govnment and Housing (MOL)-han become Increasingly unclear and fragmenel 4.31 Govetnment has begun to explore ways to impwve cost recovery from road users and thereby prvide more adeqate fundig, as well as more effective intitutonal amrgements for manging roads. There are propos.:s to increase itexational transit fees from the currmnt level of US$1.64 million to US$1.98 million in 1993, to increse vehicle license fees to thoe of Pa4elboring counties, and to introduce road user charge, as well as tax increases on gasoline awa diesel. Block grants for road mainteance contingent upon the generation of local funds are s bing consideed. Op bing explored for commerciz management of roads, (for example, through an independent roads board), are conistent with the broader program to improve public secor management and acounbilit Zambia'es = g Is mostly privately owned and competitive. It has been successl in actig buiness away fom railways by offearg reliable often cheaper service. Trucks also have the advantage of opeating door-t-door and can respond more quicldy to chonges in origin and dtin patterns. The main constaints on expansion have been access to freig exge for new vhicles and spare parts, as well as access to credkit ad adequate insurc Even So, e Zamian trucking industry should be able to supporthe extnal and Internal distrbution reqrments as the economic expands and diverses. Th one trukig parastatal, Contrac Haulage Ltd (CHL), is in reasonable financial shap and is a good perfrmer; it does not need restrtr and should not remain In the public domain.

101 -W ZA ), tational airin, operates psenger flights In the domestic regiona, wad Intercontinet makts, as we a carg sonvic rough a wholly owned ubsidiy. ZA is In dire fnl strits. It made a loss of X2.1 mlalion (US$73 million) In , and only managed to stay in busines by ruing up ovrdraft and shor1-tm debts of K1.4 million (JS$48 million). hib has ad a direct Impact On Zambia's fbri P position, since ZA uses the IATA Claeurig House (wbich un late 1992 was effectvdy unwiten by the govemet) to setdo paymets r m services. Tho main reasons for ZA's poor performa an unuitable ro structure, lack of coste e sales org, an unofitableeight operatdon, and low aircraft utlzaton Recnt attempts to Improve Zambia Airways' performance ha included lidatin a subsidiuy tour company, teminatg alibg to New York, reducing the scope of air fight, dosing forei sales offices, and pooling aangm with otier regional arlin. Furte cost utting, howevr, is urgently noeded. In the short run, this may mean cuttig the rout network irher, down-sizing and/or doig mor feign sales ofie, and lignh of structral chadges in the ieatona maet, tmination of its feight opeai. Consistent with parastatal rdeom, the medhm-term aim should be to opert ZA along coxmm lnes ad, o ponom has Imped, to consider pdnvaian 4.35 Zambia's in recen years has been simple: maximize i - ta and min debt seri payments. Now that the debt service pir has sabuzee (at least for the short tem), it as time to think about longer-term concens. Once reaon',3 reserves have been buitt up, Zambia should cut back on sh-tern Commerc borrowng. Not only are ite cot high, but more Imoay, theso loans tie up futu coper ports, thus complicag the marketng of ZambWs major export In short, de los are too psiv and shoud only be used in emergencies, and adequa reseves dwhd be maintained t avoid thdr use in the future. I the sor tum, howover, her may bo a deoff beween retucing this debt and keeping adequa rteres if the short-tm private debt on reduced, cant be esy retartd Ihe time is right, also, to consider eliminating Zambia's exist commecia debt through a debt buy-back, for which the should be considerable donor supporl Something simila should be done to get the non-pars Club bitr debt off the book. Zambia shoud condue its crr strate of opeaing through normal canes and using creave soluton to mimize Pars Club debt service paymes, combined with b al negation for debt fogivene. Both the Mnisty of Finc and the Bank of Zambia shodud be ivolved in determining and executing debt poliy to ensur both domestic ad exera finning issues are consdrd. Mutat deb service pame a high and may en inc elat in this decade. (See Chapter 6 for a more dtied dbcusion of debt issues) In donor relations, the prioes are to keep t basnci fomym= MOwM from filling off too quicldy and to make more effective Use of project assistance mcluding technic assist ). There is a feeing among many donors thatbalce of paymeats SUppOrt shodd only be tmpory for meetng the extra balance of pamens preures ihd wod a one time stuctul adjugmenl That argument ppears le relvt to Zambia Th prmary easo for bale of paymentsupport In Zambia is td pmt the sinimum Impt owth neceary for sustained gowth, riven the lmited prospects for copper ewpors and the

102 high debt sevc. In other words, Zamb's Import capacity wl be blihly consined over the net 10 yes, even ther are major efforts to economize imports and to epand nonmetal exports (See Capter 5). Without considerable balaco of payments support, impot avallablity wi be so constrained ht needed growth wi not take place. To juf tis support. Zambia will need to demo strt rong policy perfrnance, especaly in conianing InflatioIn the shorterm. - M ain the manageimen and bukdgtng of donor balanc of pqmeo weyot wml also be necesay Ithe problem witbh s Ii not the amout but the efficieny. At more ta $200 million doas a year, such asstan from biater and multatr sources rens more tha 5 pcent of GDP. Assuming dt much (and possibly most) would be considered investment, this Is a big cbunk of total invetment In Zambia. Fiscally, total project asistae represe nearly 20 percent of public expenditur, including prcancial and local government, altho not all project assistce actully goes trough the budget Thereo, It essental thatthee funds be alocated to pr uses and used efficiety. Unfrtunay, that bas not always been th caso. Too often asistac has been supply driven (responing more to donor Intes han Zambis needs), poorly coordinated (both with other donors and with th govermene straegies and programs), and excessivdy fagmented. here are more than 100 separate donor-fimded projects in agdcture alone. It is hardly wiig then tht governm has litde idea of what is going on in many projects. They are often drected by donors, std largely by the donos, and contribute Ltt to publc se"tor deelopmet In some sectors, ther a efforts to Inprove govement and donor cooration, but in many, the most serious shortcoming s thlat assistnc i not part of a coordine 8strategy. Ideally, government hould develop, with donor advice wbere appropriate, a straty of public resource allocation across sectrs and of public sector involvement witn each major sector. Dors wow.4 te be asked to fit their asste wihiln te stratees. In some cases, ther would be only one "project in each sector. Al donors who wanted to paricipate In t would co-fiance tht sector project, astae outdb it woud not be acc d. In other cases, the idiidua projec would rmain sepuue but would constue Ientfied components of a co nive sector strategy. Either way, more coordinato among donors and more strategic leadership from government wil be required. bi In the pivate sector, Zambia's policy reform shud be moving oward minimzin dirct i and inreasing the relimce on markt driven proceses. in setting rules and rates it s be prmily concerd with tho efficiency and growth prospects of the pivat secr For increased economic growth, the pivate sector will need sufficieat imnl= and As for import, the foreign exchange is tig, and every effort wil be needed to simul expot and economie an Impos (se Chapter 5). Therefore, a cenr cmonent of Zambia's policy envionm must be an txoh at reflects tihes urgencies. Nothing should be done th would keep the Kwacbarfily overvalued. This would be catast. Zmbia has made much progress in this ares in recent yeas, despt condtiug high ination.he momentum should not be lost In fact, growth in the fac of dght forei exage Is going to put premsure On the exhoange rate to move even fser than rlative prices. Importers will complai, aying de high price of Import Is choking eonmic growth On the contrary, the hig exhage rte and hence the high price of

103 *90- Imports (and exports) will be the only thing making high gowth and consined Import availabity muuay conite 4.41 Ibe immediate priotwes In trdne ii are less clear. The general directon has been to reduce nonqattatve bauiers and to move to a more uniforn tariff structe with average rates as low as fiscal considerations permit This way, it is the exchamge rate that keeps import epeni, which Is less t against expots ta a system with higher tariffs and a lower exchage rate. If govermet wan to discourage the import of luxury goods, an excse tax can be just as effective, without any accidena impact on smlat the domestic production of luxmy goods. Thes principles are still sound, but there may be some increasinlly valid arguments for exceptions to uniform tariffs. First, the average tariff may have to be considerable in the uear term because tariffs are such an effectve device for raising revemnes. Applying these average rates to capital goods could be a serious hurdle for investors in Zambia, since they will be competing with producers in other counti who are not paying a premium for capital equipment. Iherefore, continuing with lower rates on capita goods (at least until the average rate can be brought down further) may be necssary to encourage outward-oriented investment. he second exemption concerns luxury goods. It is not clear that an excise tax (on both domestic production and imports) would be as efficiently collected as tariffs, shce it would involve separate schedules and duplicate administraions. Other po'lcy reforms needed in the area of export promotion include major revisions to the duty drawback system, incrased access to export financing, an Export Board that concentrates on promotion tad information, and more market-driven agricultural prices The three major policy ingredients for increasing the amount and efficiency of are deregulation, proper financial incentives, and a deeper and sounder financial system Degt is partcaly Important and because the govenment has played a major role in regulating idustry in Zambia over the years. Moreover, the big loser with excess regulion is often the informal sector, which could be a major source of new growth in the coming years because of its more aroprite labor costs and greater flexibility in production techniques and Import dependence. Further derewlation wdi not be easy, however, becase the obviou steps have aready been taken. For example, Goverment has already eliminated price controls and abolished the Prices and Income Commision. For other interventions, reducing the heavy hand of govrnment wl mean rewrtwg long and complicated sections of Zambian law. This wil take a lot of skiled labor, includig both substandvexpertse and legal drafting skills, and consequey considerable taining and technical assistance. In some cases, new regulatons may have to be added. For example, with some naural monopolies to be privatized and with high transport costs often undercutng imports as a sourcc of market discipline, regulations to ensmure a competitive market place wiu be needed. In some cases, qualhty standards may have to be developed to assist in export marketing, although only if hes do not become a tool for builig a catel and exuding newcomers and smal producers Investment in improved technology for farms can have high returns, but this is consrined by inadequate resources and poor management of exension, and inappropriate land teunre arangements. Due to persistent budget cuts over the past decade, both the agicturl research and extension programs face simia issues: inadequate budgety finding; shortage of staff with appropri experience because of high staff turnover; lack of

105 Tem) whoever and whenev field trials are conducted or enablig AMR researdher to pardipate In trining days; * making use of the exisdng technical and management capacy In lre-scae commeral agrcuture as a resource for strengthening public etension service by, say, using commercal faimers as subject matter specwits at training sesslons; * reducing tke numbor of donor4riven extesio ptojects to a high priority co which will be jointly supported by all dons prvdng support to thfe extelsioc progras4 * InstItutig- annual with specfic targets for extesion at ntionl, provial, and distict levels and proviing for periodic reviews of such workplans with a view to identifying operatoa problems and opportuities for Improvement and -92- * _focsig extension advice to smalholders on technologies or technical packges that address real problemsuch as ways to counter soi acidiy, conservationbased farming, laborminimizing technologies (for exaple, phased nercropplng), Improved husbandry pracices, and integration of crops and livestockl 4.47 for inveors are often an early focus of economic policy reform. Zambia's new ones, adopted in April 1991, were generous, particularly for new investnel May obsever includwg the Chambes of Commerce, argued at they were over generous escially on tax and taiff payment for new Investors, to the detrment of fiscal stbility and existiniveasors. Peraps worst of all, diffenl treatment createstrong incentves fot ist invesors to reappear as ew investors to take advatge of the new rules. Looked at in ths way, govenment decided it wotld be better to treat eveyone the same, with low but =Kbrm rats of tf nd taxes (with perhaps some concessin on the taurif on capital goods) amd to concent fiuer reforms in areas tht would help eveyone, such as fuing the duty draw bak sistem This position wsu anunced In the 1993 Budget Speech, but no acti ha yet been taken 4.48 As for the Bank and the government are currenty In the middle of m4or sludes to dvelop an agenda. Top of the list should be broadenlgthe availit of crdit (even if the price Is high), especially to the agriculta sec4tr and smallscale, and pmoting and developing long term-lending. If privat Investment Is going to Incras as a faion of GDP, more savings need to be channeled through the finaal systm becs increas investment cannot be financed by retained earnings and fregpn I tment alone If Zambia can sucly taclde these shorttem policy issues, grwth can be resud. It wi require bold steps but, with good policies and realistic assumptions abouthe res of tho world, economic growlh in Zambia is p'3sible. Ihe next chaptr prents some hypotheticl economic scenarios over the next decade, and the final chapterens to the policy area to rview some of the longer-term issues.

106 -93- V. ECONOMIC SCENARIOS 5.1 The eonomc projections presnd blow ar Inte td potay 8 fesib seai of modest economic growth, with ralisi leves of Investment, imports, and per capia conumptio growth. Mm mejor reutm ar mmazed In Tabl 5.1. In gener, about policy pefrm e are opmistic while se aboutnaleveso conservative. Te purpose I not to make a predicdon. It b to show Xt, wit th drht policies, eonomic growth In Zambia Is possible or at least consitet with the consints of inal and external financing. A. As 5.2 C Pd_. Copper production is assumed to remain at about 400,000 metric tons for most of the decade, auming hat ithe basel Invesmen progam on etg operao I matained at $ milion per year, that ZCCM imports ar avallable In propordon to producton, and dth ZCCM management con es to IWmov. Copper oqut f*om extng operatio bes to decrea In 2000, but that is the first yea of poduction fiom Konkola Deep. Thus, total copper production actually inces in the arly yeas of the nen decade A conservative copper price of 87 US cents a pound isa umedfor 1993 fll1ing to 85 cens In 1994 and rising to 88 cents in Aftr tihat, It Incras by just over 6 cen per year to $1.20 a pound in te year 2000 and 2 ceb per year hreaft - which correponds to the most recent forecast from the Wodd Bank commodity group. 5.4 M h. Cobalt production is aumed to stay at 4800 tons year, compaed to a theoretical caacity of S0 tons. Mhe cobalt price is asumed to fall to $7 per pound by the end of the decade. Lead production is assumed to fall steadry from SO0O tons in 1992 to 1000 tons in 1996, ceaing therafter. Similarly, zinc production Is reckoned to fall fom 8000 tons to 1500 tons by 1996, e ceasing altogether. 5.S Non:-Hional EsNor. The base case aumes a doubling non ewpors from $100 million in 1992 to $200 million by 1996, after which they grow at about 10 percent a year in US dollars (see Annex B). 5.6 h_s. Import requiements are eimaed for eight separ categories. For ZCCM inp, they are assumed to vary with outut, thus they stay about constant in rea US dollars, because copper produ Is assumed to stay constant until the last few yeas of dt decade. For fertiizer, imports Inctrase from US$33 mfllion in 1991 to US$94 milion in 2002, somewhat less than the hinrease In agriculural output Imported fertlizer sag per hectare decreases by 13 pet beca of Increased frtilizer pric, ing crop dibuton, and increased use of natural iizers, such as mamnur and compost. It is asued that no maiz imports required after For project leng, the amount of imports is atomatically equa to assumed project lending (see below). For investment, tho percentag of capital goods imported is asumed to fall from 25 percent In 1991 to 22 pert in For consumer goods, import a asumed to vary with the chaneo In spending with an elastcity of 0.8. Findly, for intermediat goods, import are xpectod to vary with mauing GDP, with an aumed elascity of 0.8. Thus, withi each category, import co_bmion is either zero (as with ZCCM or modest (as I tho elatci

108 -95- used for Investmet and for itemeie gods). Substantial compression b aumed only for petrleum, where reive prices wil cage greaty, and for main hmport, which are replaced by domestic production. However, becau maize Impors cee altogethe and be ouut is stagt In import-htensive mining, overall hports hcrease by less than 4 percen In real terms fiom 1993 to 2000, while GDP ncrea by just over 5 percent, implying an aggregatelsicty of about 0.7. S.7 E. 'me development of the IConkola Deep copper depot is asme to be financed entirely from foreip Investm. Other fog invstment Is sumed to Start modestly With $7 millon in 1993, easing to $100 mill CA In 200). 5.8 M. Paris Club reschedulings coinme along the lines of the July 1992 ageement and there is an equivalen reduction In non-paris Club bilatera payments. Commercial debt is eiminad in 1993 by a donor financed buyback. Ihe IM arrears are replaced at the end of the rights program by new IMI drawings, assumed to be twotirds ESAF and onethird ordiay resources. 5.9 Donor balance of paymen asstc I projected to decine from the current $300 million or so (excluding drought support) to about $150 million a year by the end of the decade. Most donr, including the Bank, view ftis type of assistance as justified primarily by the nsiional costs of structu adjuset and expect adjusting countries eventually to close the cmrent acount gap. Project and (non-rught) commodity lending remain at curent levels in rea term except for the Wv;ld Bank whose disuse Increase considerly over the period. Curent Bank diburseme are unusually low becase the nearly four year wspension left the Bank with very few programs on the ground Invflum. Total investment Is assumed to increa from 13 percent of GDP in 1991 to 26 percent by the year Government Investme rises from S to 7 percent, whie mining investm to 7 percent of GDP in 199S-97 (KonkoIs Deep) beftore declining, and other private investment increases from 7 percent in 1993 to 17 perent in B. Xy DgMnants oft Growh 5.11 The key deerminants of economic growth in Zambia are: (1) (2) availabw of Imports, ineased efficiency of resource use, (3) availability of land, and (4) quantity and efficiency of investmet These fctors are dicussd below. In the longer term, other dimenions such as population growth and development of human capital take on creasing mporce. lese are discussed later in the report. S.12 Imgo avait is datermind by metal exports, other exports, debt service, exen assistance, and foreig isvestment, are detmned by growth of key import-using sectors of the economy and thi dpendece on imports at the margin.

110 -97- S.13 Table 5.2 shows the import reqime in our ba case scmaro. As mentoned above, *he hlmjrt intity of vesft Is asumed to dceasc e fom 25 to 22 perceut over the pedod in response to the me depred exchage rae, the Increased percen of Investm occung in a Wiculre and small-scale ad the gret responivees of the prvte seor to market price signals, th mitigate ais highly capital Itsve techniques. Simflarly, the import Intensity of consw8u goods and ntrmedie Imp to are umed to decra over the piod, responding to the deprcated age rate and graer riance on markt prce sigas Eve wih this reduction In iport dep,ndwce however, import avaiabhites fai s ctly short of import requiremen In die 1990s. Addiona astance (or rescheding or port) wil be needed to close the etoa financin gap. Table 5.3 shows the ex al financing rquiremen using the import requirements from Table 5.2 and the reschewing and asdstace assumptions desaibed above. The remaing shortfall averages US$135 million over the period and increases to an average of US$227 million from , lugely because of incring debt service obligaos to the Paris Club and the IMD. This gw can be dosed by: 1) lncreased expos - Non-trdional eports a asumed to tple from 1992 to Increises beyond that are possible but would need consierable investmen (on die suply side) and would probably requl h more real depreciatin of the exchange rate (on the demand side). 2) Reduce debt sevice - The scenrio described abov already has pushed rescheduling to the limits currendy available. The only remainn possibility would be dhe re-rescheduling of Paris Club amortzation of the previously rescheduled debt, payment of which starts in 1999 and averages US$120 mllion a year. Anything beyond this would probably men chaging the multtera debt sevice paymens. Ui now, mlatera organiation have decided tha benft from relief on debt sevice obligions to heay debtburdeed counties would be more than offset by the increased costs to boowers that would result from dowadng scuities offered by those oranztin. Instead effort bave been foced on creating special souces of funds (from donors direcdy or from the income of the mutilaterals) that can provid ext astace to the heay debt-dened coies that are underting sound adjustment programs. Zambi aready has the maxim allocaions under these programs. One possibility is ta these finaning sources may have to be increased to dea with the problem hat counties such as Zambia face, namely that even with excellent export peformance and coniderable import compreion, the limited availblilt of imports due to high debt service burden may severly rtict Zambias abilty to generate sued and stnable economic growth. Anoter possibility is to permit boowing of soft mey (such as IDA in case of the World Bank) to repay obliga widt high debt service payments (such as IBRD). Another answer would be to assume a higher faction of Zambia's IMF drawings to be on ESAF tem.

112 -99W 3) 1 Zambia has received exceptdonal levels of exteral as_lstaceln the past two yes , tbb was due mawy to the exraordinar eflt to dear Zambias arrears to the World Bank and thus to pmit n of Bank assistance. In 1992, it was due primarly to the drought. The shorttem prospects for overall aid budgets are not promising. If Zambia demonstrates its strong policy performance, It can expecto continue to get higher than average aid, but it would not be pruden to build a development strategy on levels much above hse aumed in tis report. Te size of the finacing gap in our projectons, however, does suggesthat balance of payments assistance may have to continue at closer to current Ievels for much of the 1990s If growth Is to be sustaned. 4) BdJmod In c mdf cm The ideal solution would be to have high growth with low imports, but experience in other countriesuggests that import elasticities much below one for sustained periods of econom;c growth (partilaly for a small country not producing a wide variety of goods) are not likely. Zambia should condue to do all it can to sdmufte exports and to reduce Import demand, however, and this suggests that any altempts to keep the exchange rate below its market level would be cstrophic for achieving sustaiabl growth. This also means that efforts to contain inflation are crucial if Zambia is to get (and stay) on a susainable growth path, given the natu inlinaton to resist Increases in the nominal excage rate. 5) educed gw h. Ihe final and least attractive way to balance the eternal account Is to reduce the rate of economic growth. Put more direcdy, if enough progress is not made in the four areas described above, reduced economic growth (that is, a rate below what i ssumed in our base case scenario) would be unavoidable. MM iumwmtase S.16 As a result of Zambia's poor economic policies, economic growth has been well below that which could have been achieved given the country's resource endowment, import availity, and investment. It then follows that increased growth can be achieved if those policies are put right In other counties, vaious policy improvements have improved econmic growth (rable 1.14). This cross country evidence suggsts that, for example, a set of refm tat raised secondary enrollment rados by 10 percentage points, eliminated a black market premium of 20 percentage points, rised equipment investment by 3 percetage points, incrsed financal depth by 10 percentage points, and reduced input price distortions by 20 percentage points would in the long run iease GDP growth by 2.6 percentage points. All of these reforms are within the feasible range for Zambia, and some are already underway. S.17 Th base ce soceaio assumes that agricultural GDP will increase by seven percent per year (excluding the post-drought recovery In 1993). Tnis is quite high compared to Zambia's hitrical performance and to other African counties. These increases cannot come primarily frm higher yields. Considerablextra land will have to be brought under culttion. The projections in Table 5.4 suggest at the following breakdown of sources of agriculturl growth represent a feasible range of possibilities.

113 -100- Table S.: POTENTIAL FOR LAND UTIATION, W00 (000 Hectaes) "s 2000 AnmI COateod Land Total Farm Uno*at CuhIvat High Law Hi8b Low High Low and Medium Sab 1, y , gad Smalolder 3, ,S74.5 1,049.5 I 1,206911, ,.2 1, , , , , ,610 1,50.1 2, , , ~~~~ DHV ConsuknB DV, Assemnt of Potentil LAd fr Epanding Ag Report, Part 1 December1992. dukal Production in Zabia, Drat Final * me necessry land expansion growth (underlying the agricultural GDP projection in Table 5.6) can be met within tke eitng land holdings in both commecia and smauholder agrilure. It can come primarily from better land utlization. his would lead to reduction or elimination of fallows or increaed development of land currently unutiized. Assuming no change in tochnlogies (and hence yields) and cropping pattern, Zambia could triple its agricutural output by the tum of the cetury through lantd epansion alone in the high case and more th double It in the base cae DiSrences in yields between commeral frmers and smaeroldes argue strongly for public investme in aaptive research and extension services in smaiholder agriculture C(able 1.11). These diffeences are due to lack of apopriat technologies and sub-optmal maagement practices In smaliholder agriculture. Invement in adaptive research and exnsion Is furher Justified by the grer re (parcularly to labor) associted with improved technology. A recent World Bank Study (Agriculte Sector Strate: lssues and Optons, January 20, 1992) foundtt returns to domesdc resources abor and land) improved significaly with the adoption of impoved crp ehologies. It concluded that bett techology enhanced compaative advtge of all conuodities, and investment in adapdve research and extension to exploit this oportuity as wjfied. Q andeneum of nnt 5.19 Increasing the amount of Investment Is necessary to ahve sustinable growth In Zambia for two reasons. First, capital needs to incrase. There Is excess capacity in some sectors, but this wi not take Zambia very far, and some of these sectors may not be consistent with Zambia's comparative advantage and may have production technologies inappropriate to its need to limit impot growth. Second, new investment Is often the only way to bring impwroved tecologies or more approiat tehologies into Zambia's productive sectors. Even tie abundance of land canot be effectively utilized without investig in new farms or restorig umued ones.

114 Its not possible to estmae prcisely the level of new Investnent needed for any desired level of economic growth. t depends on the Increased efficcy of sng capil and on tho eficency of new Investments. The Incremental capital output rao (ICOR) Is ofte used to test the feasibility of growth scenais. Rougly speking, Is often thougt to requie Invuem of at les 20 prcen of GDP to achieve output growth of 5 prcen (an ICOR of 4) and ths would Imply a hbo eiciency of new capial even by world standards. Zambia does bavo some advntages her. no oporunit for naed growth from better economic policies and the relte avbily of land suggest a lower capital output ratio than would be needed in a counry withf limited efficiency gains and new land. On the other hand, Zambia does not begin with an efficient infucture or a well educated work force. It is possible tiat investment levels of 25, or even 30, percent woud be needd to achieve the desired growth. For that rason, we have shown two senarios in Table 5.5, the second of which has higher investment and roughly the same r of economic growth. Note that the offseting difference is in the growth pat of per capita conm o Once the higher level of Invesm is acieved, the growth rate of per capita consumption can be as high as before but growth In the intetim is lower and so the seoond path always has a lower level of per capita consumption (about 4 percent lower by 2002 In this case). Table S.S: Imast of I nrovot E_ki AKCASE n _ ?Orowtblato(%) S.9 _/ GD? COR Capita Coaumpion (%) (Billons of 1987 Kwab) UWEK EFMCIIEN:Y/IUGIER INVESTMNT CASE ODP GmwRiat (OMMt _ GD? _ ' Cita Cympto (%) of 1987 Kwa*A) Whichever level i required, it will have to be financed by freig or domeic savings. Domestic sav in will have to come primarily frm retined eaigs or from savings nneled through the fancial sysm 5.22 Perhap the most important change needed to increase domestic savings, however, is to eliminte the fis deficits so hat dthe govement is not drawing funds from the financial sector.

115 -102- Given the large amounts of etrna financing that go trugh the budget, this means hat the public sector would actually be a source of saviags to fina private sector nvestm. It wold be a mstake to rely to heavuy on Xt source, however, becuse governmn have a natural tendency to pend eveything they collect. In deciding on the prper fisl stance over time, the govement will need to balance the advaages of the government as a collector of money agint the tendency of spending to grow faster than it should when revenues permi. Thus a key determinant of the viability of these investment scenarios will be the abiity of the financial sectr to offer a widenging and more attractive range of savings Ituments to genert private sector S.Avn The other key derminat of the level of investment will be the return on new and exist investment. Unless it is high enough to attract investors, noting else Iu the plan wi work. Again it is difficulto quandfy the various determin. In fact, most of the elements of Zambia's economic reform program Impact in some way on the rate of return to Investment. Mmreelemen merit special mention. First, the government needs to reduce aministative interference in (and regulation of) the private sector and to rely more on market prices and the discipline of open competion. Second, the efficiency of supportig Ifau e, specialy ransport, power, and telecommunication, must be Improved. Tbird, taxes and tariffs must be at low rates on a broad base and applied fairly and uniformly. Highly generus spcial provisios for new investors are not necessary and may be harmful. Refrms duld look instead at ways of lowering everyones rates, while mainaining revenues at acceptable levels by broadening the bm and relyig more on indirectaxadon. C. G th 5.24 Table 5.1 above presented the basic elements of the baseline scenario. More detail Is presend in Table 5.6 below. The highest rate of growth is in agruture Zambia's agricutura growth prospects are subsantial. As a result of inappropriate Government interventions the past, agricultural growth has been generaily modest and far less tan its poteta. Other countries in the region (for example, Malawi) with relatively severe tesource consits have done better. Zambia's agro-ecology permits many varieties of faming systems and crp. Analyses of tesource base, market prospect, and comaaive advange suggesthat it has good potent for expanding and diversirfing its agrictur p duon. Realizadon of this poteal, especialy among smaluholders, will requie changes in public policy and insttutons, and Increased Investment in research, extension, and ifsucte (see Chapter 4). Existing techmology in emergent and large-scale co ci agrdculture is adequate to gerate substantially increased productio. Appropriate transfer of technlogy from commercial farming to smallholder will be critical for Increasing the productivity and production in maholder agriculture and for transfoming much of the subsistence component into commercialariented agrulture Zambia's considerable resource of native cattle breeds also represents a substial poteni for growth. Tapping it wil require improvements in animal nutrition (feed supply) and anima husbandry practices. With such improements, average producvity increases of up to 30 percent cod be expected. Public investm in ension services for this pupose would thus have a high payoff.

117 Of Zambia's estimated 9 million ha of cultivable land, about 25 percent is of good qualty and 12 pecn (1.1 million ha) of the highest gicultua potentiail. The bet lnd I In the already densy popuated and relively better developed ceral, sout, and easte plateam. On aveag, only 1.2 mlion ha ar cropped every year, indcating conder lnd utlpization en In the high potentl area. Some 46 pecen of cultvable land (4.1 mwion ha) Is bwy leaced, reatvely InftWo, and prone to aciity. Anothe 28 percat (2.S million ha) has low raifaill and adic sandy soil and Is most suitable for nsiv catte ranchig. Nevertheless, the supply of land Is generally abundant, even though farm InvestmentB (for example, fetilz, lime, and rgation) might be required to improve its qualty In some parts of the country. It is possible for Zambia to bring under ctivation at least 0.5 million ha anually over the next 10 yeas. This would increase the ctidvated aw six-fold, but would stil represn only twothrds of the total cultivable land. S.28 ZambIa's Irigation potental Is among the highest in Africa, esdmated at 423,000 ha, or about oird of all cmpped land. However, only 25,000 ha (or 6 percet of the potential) is currently irrigated. Given the right tecbnology (for examle, high value crops like horticulture), Zambia could develop irrigation at 20,000 ha each year for the next 20 years Zambia also has an enrmous (and underdeveloped) wildlife resource. If protected and well-managed, wildlife is renewable and can be a major source of income and foreign exchnge. Iegal poaching, however, presens a serious twreat, particulaly to black drio, elephant, cheeta, leopard, lechwe, and crocodile. Nevertheless, the potentia of Zambia's 19 nadonal parks (coveing 6.3 million ha) and 32 game management areas (16.2 million ha) as a source of foreig exchage earin remains considerable. Controlled wvife harvest. regulatd hunt, and game ranching and farmig also constite considerabe pontal for genertng public and indid income Ihe Adminitive Management Design for Game Management Areas (ADMADE), conceved by the Nationa Park and Wildlife Services, is a cmedble stq toward realizing this potentia Changing crop patterns could make a major contribton to agriculturl growth. Ihere are promising opportunities for %. rersifing agricultural production Into commodities wit highgrowth pote and vorable income a euticities. Zambian farmers have ample Opportunities for Improving production efficiency by shif"img to commodie with relatively high value added In which they have a comparative advantage. Opening up inteational trade will also encourage diversificaon, while not neglecting fodgrain or the crop sector. Govenmens high priority for food security is jusfied because at the household level, achieving adequate food seurty wi be critical to agriutural diversification. Smallholders can only diverify aftr pressig food needs are met Durig the adjustment program, ImprAements in yieds and labor and land utilon can allow Zambia to meet fi foodgrain eeds on the same (or less) land. With proper incentives, most shifts in production at the marin woud be out of commodities In whih maioldes and emegent farmers do not have strong comparative advatg Short and Medium Ta Impact Changes in commodity-specific growth in agrcultu can be expected in the short-run while changes in production patterns can only take place over the medium and long-tem. In the short-run, growth will depend on producers' responses to market liberalizatio and price decontrol fr maize and fertilizers. Lack of suitable data and severe market distortions in the past do not permit quantitatve spcificaton of supply respons in Zambia. Nevertheless, there is overwhelming evidce in other counties with similar onditions tha famners are generaly responive to impovements h inicentives that accompany maket lrlzation and elimination of price controls. Moreover, recet analysis of production

118 -105- efc y by the Wodd Bak nicates ht pes under free market conditions exis for shft pductio Into commodides with eladvey high value adde who, at the sme ime, Wp ovng poduction ei. T underlies the ste prpod In ths zmort. S.32 Although market libeatio and pricoe decontrol would reult I y in reldvely highe prce for Ipt and prdut currently subjec to controb, b snot possiblo to quantity the impact of such a ise. Retvely high nput prces would reduce dead for Iputs (for example, ferthiie and pesdtide) and products that are dependent on such Input, with the likey esult ben both producdton and cmptionubtt. Mai and tobamo, In paricular, being elavy fertilizer-intensive (especialy in commercial cul) may exprec slight decins as ty ar substtutd fbr by less fertil-itsive crops (say, oiseeds). In de agricultur, lito production substi n is likely In the early stages, paicady folowing the seve drught of which greatly eroded household ftod security. Smailkoldes would tend to reduce the area planted to maize and Intenify crop husbandry to hncr yields. Since Impwoved crop husbandry is a critical complement to fertizer in achieving optil maiz yidds, overall maize producon among smallholders may acaly incres as the cropped aea is reduced at the margin. S.33 In eneral, crops tha are less fertlizer-intensive(cotn, sorghum, mmet, and sunflower) or do not requir ferti (ounnts and soybon) are ly to substtute for ferti-inesie crops at the margi As a rest, there may be no sgiiat hicrease in asggega puct supply In the short-n. Production of crops that hve shown raively high growth in recen yes (for eample, oilseeds) may contiue to expand rapidly in the next five years, but a is unlikely to have much effect on the supply and production stucture, given their id smal ba. With the avlability of revely aroprate technologies and cond le land underilizon in commerc aiculture, relatively more commodt-specific sply response by commecal farmers can be expected ta In smaliholder agricltre. In ommecal faifntg, wheat, soybean, sunflower, tobaco, and beef are likely to ine sgnflcantly In the short and modium term LogTerm Impact. In the loag run, farme' respones woud prmaily be detmined by Ipovvements In non-price Intves such as improvn in baic support svices, rural financ rural and improvemens in land tenr ad policy. Sustned adjutme in the real exae rate, cowled with removal of export,rectio, should also promote expansion in the production of export commodites in which Zambia has a compartive advantae. These include maize, beef, tobacco, at, and hortdcture produce (fresh table grapes, fresh and caed asprgus, cut roses, freh and foze berdes, fresh green beans, and fresh and processd nangoe). It, therefore, possible tt the improved rlative comparative advantage of export commoies may lead to inaeased farm incomes and employment. Improved efficiency in domestic trd and marketing wll sue demad fr import-replacg eseay oi6sed whose demand i curreny supply-costained. In the long ru a,e supply of agricultural mmots will ncras significantly, pwvided autment i sustained ad the requite ilnve by fanrers and the Goverment are implemented. 5.3S Two alternative scenarios of a t growth inorporatig e al dements of the stategc framework were developed to examine its impact on agriculur growth and diveficaton between 1992 and Ihe methodology combined projection of past tends, with best estmates of the Imact of changes in policy, instibuons, and public and private Investments.

119 These projections are basically conditional forecasts, since the relationships among the drminants ar not certain, nor are they likely to rem stable over the nent decade. Commodity-specific growth will depend critically on smallholder response to improved Incentives and land tenure. In most cases, these grwth rates have been conservatively estated, given the difficulties and uncertaines associated with the implemton of policy chages. However, i most subeco, intw proucto relatve to demad is extremely low, so that subsequent higher growth would not sbantlly affect domestic demand. For each scenario, relatively low growth has been asmmed, t account for the possible subsittion effects in the inital stages of Implementation, and higher growth has been assumed in the second half of the decade to capture the cumulativeffects of imp l. In the decade, expansion in cultivated area will continue to be the major sour of growth in crops for both smallbolder and large-scae agriculture. Yield increases would be significant in Irrigation-bated crop production, as well as among medium-scale farmers and in livestock production Under the high growth scenario, annual growth Is postulated at 7 percent in (compared to 6.5 percent for ) and 10 percent in These growth rates are conditional on imple on of the chages specffied in the strategic framework, a 15 percent increase in land area for high-value commoditie, and a 5 percent increase in emergent farmers (gaduating from subsistence agriculture) with a consequent increase in productvity (see Tables 5.7 and 5.8). Ihe low growth scenaio posates an average anmual growth of 5 percent in , and 7.5 percent during 1995 and 2000; land expansion at the historic average of 10 percent; and a 2 percent increase in emergent frmers The diference between the high and low growth scenarios is considerable, but both cold more than double ra agricultual GDP by the tur of the century. Major sources of growth would be caops, livestock, and foresty, which together would account for almost 93 percent of agricultural GDP. Icreased productio in crops and forestry would be due to area expansion. Development of an epoct horticlture industry would contutoe sigificany to growth in the crop subsector. Increasd producdvity would be the major source of growth in livestock, nmely beef production, large-scale agriculture (mainly for eport), and poultry. Increased beef production in smallholder agriculture would be significant but relatively slow in the early years, reflecting the need for Inceased public investment in extension and private investment in Improved feed supply before productivity can be Increased. The considerable gap between the low growth and high growth scenaios rep nts the substanti costs of delayed change (or no change at all) in policies and instittons. The base case scenaio shown in Table 5.6 assumes a constant 7 percent rate of GDP growth In agriculture which lies between these two scenarios The Impact of the altnatve scenarios on the sector's structr change (diversification) over the decade is shown in Table S.8. The sector would be more diversified the more the strategy is Implemented. Under the high grwth, the crop subsector'share in agriculuural GDP gradually declines from an average of 54 percent in to 37 percent by Under the low growth, the subsector'share also dedlnes, but less signlflcanty - to 41 percent by The livestock subsector, with high productivity poet, is expected to be the most dynamic subsector. Is share In real GDP would incrae from an average of 27 percen in to 47 percent in The relative share of nal resources would remain at uughly 17 percent, despite expected higher rates of growth troughout the period.

120 jjfi - ir g 11l

121 -108- ad ambious projtons of noa al export growth, Zambia wil have difficulty afng uffcint Import so a not to slow down the economy. Even with cosiderable Import compression, the fnancng scenaio present fals short by an avage of $175 million a year in If hs amount of adtional reschedulg, asstan, or export growth canno be fud, the pri of foregn xchage will have to Icrease even furher than i assumed in our projectons (to com s Imporb and stimulateport) and tis will undoubtedy lower economic Swwth. In is ontex, is tusefl to look at alternative outcomes (some beter, some worse) to see how these affecthe scenaro C n Every one US cmnt change In the copper price changes export earing by about $8 I a year. Th t would take a price that was well above the sceaio chosen to close the finaning gap. On the other hand, If prices are well below our projection, the finamcig g would be eve larger lie ijumab Amex B shows a high case for each potental source of expot. They rpresent the best possible outcome. Adding them up for all products would geate an aveage of $200 milion a year in addidonl gross exorts (min something for the addit i Imots neded). Claly, It i nt likely ta al of these high scerios would occur at one. Even If y did, however, th gap would still not be closed aoer MaImum reschedig is aumed in the shortterm, but there could be some rsuling of Pais Club amortizaon aftr 1996, which could save $120 million a year ovwr the later yes of our projection period. Lowerng multlatera debt (which is not eligible for rescheduling) would requre policy changes t woul' have to be addressed as global isues, not jus In the contex of Zambla O side, we have already looked at a higher ICOR scenario, (that is, one in whih a higher level of invstment is needed to achieve the projected growth). Altntively, we could assume tat the investmet levels are as they are in the base case but that the ICOR is 20 pecnt lw tha sumed. Basically, this would reduce the average growth rate by about on pecet each year. Giv e rate of populai growth, this would reduce per capita growth conskidably. Percaptaconsumpon from 1993 to 2002 would not grow at all compared to the 12 peret growth in our bse case scenario ]Ish Greit Cm. A more optmistc scenario was also prepared which assumes both mor invesnt and a highe efficiency of new and existing investment Cable 5.9). Comparn ths cese to the baso case (Fales S.1 and 5.6), the high case has GDP growth at about one pecn a year higb. The Investnt ratio increaes to 31 percent of GDP in the high case, compared to 26 peren in the base case. Ihe aveae ICOR h slightly lower in the high case, aveagi 4.0 in , compared to 4.2 In the base case. Ihe growth and inm diffwancos again offiet one anoh in terms of per capita consumptin, but once agn the GDP effe stroner. The avee incrse in per capita consumption is 2.0 percent in the high case, compaed to 1.2 perent in the base case One of the most powerfl elements in our economic scenaio is the rate of popaton growth. ZambIa's cmrent high rae 3.2 percent a year, together with the high dependn ratio of over 100 prcet, make it difficult to generate positive per capita growth in Zambia.

123 In scnarios prened above, we bhav used he sndard populaton projaction frm di World Bak which fertils }ity ra dedline to 6.47 in 1995 and to 5.63 In Isb poduces a doublin of popo In 25 yas ad an avrag growth over ta period of 2.8 percnt. If we coud lower fertity more rapidly (to S.24 in 2000 and to 3.43 In 2010), we could dow the doubling to 4S yeas The differen in terms of woago living standards of such a drop in feiity ra would be coizlderable. To calculate ths, we need to mak an sumptn abouthe ompact of population gwh on output If we esn Outp as being coaied by the amunt of Imp d capital, tho Impact would be ngligble. If our Imae is one of eesivo agriual Srawth resodn to more and more poti fares, dio response would be closer to one-t-one In die long-tm so lons as land wu available. In Zambia's ca, It would be reasonable to aume no effed on output In the furt 10 years, bu the diffemc would be all in tho mer of chldrn, and to assume a 50 pecet Impact on outu aftr 20 years (which is high given Zambia's dependenc on copper exo and other fixed sources of forde exae). 52 Under those umpt, moving to what the Bank cal its irad frtlity decline scario (s Tablo 5.10) would ralt in a populto that is 3 peret lower afr only 10 yer. in per capia Icme, this is mneicaly equint to havng 3 per more outpt or xim ly.3 pece per yer higher grwth. As sn In the discussion above on Inese, this would usualy requr an addiona 1.5 peren of GDP In additional Invetnt every year (which in 992 pdes would be ariy 10 billion Kwacha or US$60 million). Thus to the extent uding of family plnning progamm can contribute to a decline I verage ftlity of anywhere na ths mniu_ do, th payoff in average lving standards would aer to be consideable T efct o is ve song If we look at dependency rti. Mh rapd fetit decloi scenario would not only lower population by 3 percent in 10 yeas but it would lower the depndency rato by 6 percen Thus, not only would ouw per prso be higher but services for child and the aged would be enhanced, becaus availablo resources would be spread over a much smaller depedet poplto Mheffe ove 20 ys is evea stoger even f we aume a 50 pe contribtion t to inresed outut Tho plation would be 13 percent smaller with the rapid fertility decli senario. Thu even if output wer 6.5 perce larger, per capita ouput would be 6.5 prcen hir ti In our baseln sconalo. The dependecy atio would be a ful 33 percen lower ta In the standard scerio, which coud make an enormous differce In heat and education and gnal living stadards. For Zambia to make subtantia progress In iceasig the standad of liing, moving to somethig like the rapid fert scoadro would be tho single mot powerm step ey could mabe; without such a change, progess will be frustratingly slow.

125 Zambia has on of the most comple lnd tenure m In Afica. Not only b k a mt of Wtr Europe aid tradion African ten, but there ar al huge va (espeay in Inhertae) within the taditiona elemen Likwise, there a unique system of leasehd on sta land (forn crown land). The Lad Act of 1975 vested all land in the Head of State in perpetuity on behalf of the people of Zambia. Leases are traded or sold, but lad In f Is cond to have no value; only Ipvemens are valued. LAss a subject to many complex require and procedures tha ar goveed by an Agricultural Land Board, which was created by the Lands Act. 6.2 Cusomay land tnure has evolved under a system of subsitence adrcutue with LWe constrain on avaiable land. HistorIcally, theso syem wero wel iegrated int the cultud and econmti condiion of the area, provid sufficet lad security, and resed In ecologically stale use of natura raeour. However, icased populadon, Improved tranporttion ad th grwth of large urb market have rested In mr Intensive use of land reces In some ar. Under these press, cuma y land tenue has failed to proe the incentives requred for sustainable reource use. Theor, there has been ining presu to convert usomary land tenure to a system better suied to itsive us and capta investment. 6.3 ln mm was iroduced duting Brsh colonl ule to ncouragp commercial agricuure and m but was resicted o areas designated as Crown Lnd. A such lad was originally held freehold or leasehold but. under the Land (Conversion of Tides) Acts of 1975 and 1985, It was al convertd to leaschold, with the State auming OWn ip. Las (up to 99 yea) can be gned by the Presidentthrough the Coison of and. St Land is 6 pecn of all lad in Zambia and is concentraed aog the lineof-rail and in e commerdal fmig aeas of Eastern povin, major miniag area of Nortwesern and Capperbet Pvinces, and urb area. Nation Parks make up another 8 percen of the land ar, while State and Trt Lands cover the tremaig 86 perce 6.4 Reservo and Trust lands were originally areas where customary land tnre remained under the ontrol of traditional leders. That control, howeve, has been soeadily eroded, with many of the powers to alloca natural resoure, such as widlif fort, and wae, now asumed by cal governmenlg Evene risgh to alocate land for ardicul pwoduedon and I IIInow g falls under h jurisdiction of both tdiona leaders and Distict. Ind, the degm of cotrolthat loed or traditional leas have over tenure artangmen varies enormnusy with their power and influenc in communities. 6.5 Conversion of Tst or Reserve lad to State land reque apprv of the locad cf and the District Council. Even then, under the Land Survey Act and Rets, there must be a Cadasr srvey of the land, with te cost bome by whoever is seeking forml titlo. Ibe cost of employing prive survey is beyond the means of many smal landowne, and there is a long wait list for govenn surveyors. In 1989, the bacl of plots to be suveyed was esdmated at 10,000 - or four yeas. With no inc in asrvey d t

126 -113- capcity since then and demand Incaing considerably, the backog b now estmated at 10 years. 6.6 To allevia the delay, 14-year lease wer gnted to those seeking tito but unable to undertak a fbll survey, but the leases a not renewable and many wil run ou in the near futr. A proposal to rela the 14-year limit (even extend it to 99 years) sems xpedlent, but it may result in a heavy load on the leg systm as the number of lua boundary diputes Incres. Elimit the bacldog through new technologies and Inovative ways of financing more suveys would be a better long-term solution. 6.7 Land under leasehold can be acquired by the State In a number of ways. It can come from a wiling seler at the maket value of th undepreciated asets. It can also be acquired with two months notice under the Land Acquisidons Act (with or wihm out compeaton for mpovement). Ther I no appeal. While this act prov the overnmat with a means for expediing lad acquisition for developmen, it has been criticized In the past for acquirng lad wihout clear plms or objectives for development. 6.8 Laehold land can lo be acquired by the Government under the Land (Conversion of Thes) Act and the Agricultu Lands Act, when there is a breach of covenants. The most common breach involves nonutiization of allocated land or failure to complete building investms witin a specified time period. A poor undersing of agricul land magement and tena difficulties in meuring the level of udlization has sometimes led to inappropriate under these acts. The result has been the perception of reduced serty of tenure by commercial fame, which In tum has led to low long-term capital invesuatme 6.9 Lasehold Ture and Policy Issu. The Nrinta problem is the notion of 'laind without value in a mixed economy, rapidly evolving into a market one. The nderlying rationale is that people should not benefit from the impact of extealities (for eample, populatin growth, public infrastrctural invegsm, locadon, and soil quality differences on the value of their land). The real Issue is not so much how these values were generated, but rather how tiey can be extracted for the benefit of society, while providing adequate incentives for efficient land use. Varying taxation incrementally wih excess value has been sggested. Under this policy, farms on the most favorable lands woud pay taxes equivalent to the diffce I resource values created by enaiti. This policy, however, has yet to be adopted by the Governme The abec of such a system, coupled with ndequte incentives, has led to gross under-utiization of Wad in large-cale commercial agriculture, most of which is leasehold. A diffeeal rent on state lands would encourage more efficient wa use and increase producdvity Instinal capacity for land adminisotan (and survey and registtion) is weak and constans the private development of state land. The 10-years wait before the land can be suvyed and registered reduces the incentives to develop. Moreover, wate rights can only be granted to famers with registered leaseholds, and the dow development of rrigation in is due pardy to the long delys in leehold re aon 6.11 Cstmary Laud Teue and Poct Issm. Zambia has no red option but to modify its cuomary tre systms. Such tenure served Zambians wel in traditional socies, providig broad access to oe pporunies. Under -m- c-oditions in agriculture, however, it is not meeting the needs of coercial agriculture. hese systems

128 -115- sustaed resou u -m at likely along major tr around urban arms. rou and * EncBurage privtes r Involvement in surveyng, by prvkdn apopriat Ineves, tus reducing the bacldog In surveys. * Develop a system of land rent on leasehold land that br refloc Its producdtve value, thus reducing the incentive for land speuaton. * Introduce greater formality in registration and documntaion of cusomary ture. Clearer demarcation of land and use rights will be needed to resolve diput as population presutre inreases. Gve atteion to the implied chaiges in other propertyrgh -such as huntg rghts, gatheng igh, and rights of way - not conected to agrcultal use rights. Converting land to leahold on the basi only of eustig agricultura use rights my rest in pwple me lsn exsting rigt to ohr resources, for example, women who do not tadionally have agcultural use rights. Mecanismshould be built ino the lnd Iaw to monitor and ensure an equitable distrution of property rgts, as wel as landuse rihts B. mibt 6.16 For the long-rn benfits of adjustment to accme to the poor, some botlenecks need to be rmoved. Access to credit could be increased, provided efficient Istituto for small busins regitaton are developed and ownership or long-term leases on ditional land dar acceped as collat. Beque las should be changed to enhance ive on tadional and, and tde leg position for women in land tenure should be addressed. Baiers to the Infoma sector should be removed. Ihe divson between formal and inormal sector seems mostly to benefithose working In the foma sector. Their wages are deoemined by collecve bargaining, and they are to some exten protected from mishap by a (for from perfect) social security system Simpler business regration could remove some distnctions betwn the formal and infmal sectors, and access to social security by informal sector employers and employees could be expanded Bette rurl if ucture (roads, Irrigatin, maret hnnels) would enance the inm effect hfm gdcu price cmges for the rural populatio Much of Zia's rural has been neglecte durn the economic decine, and was nevor much dewdeoped In the remote are (Westem, Northern, and Easm prvic) whic ha a more than ppona share of the poor Structural baiers for women, disprpornly reresented among the poor, need to be removed. Tradition und custom view women as minors to husbands and male adt rdatives. Alhugh no leg reswtction exists, women have a hard time obtaining land from lnd auhrities; in some districts, married women must provid evidec of the husbands conse to obtain land, while unmaied women are often not allocated lad unless eq ave chud On custmay land, land use rights allocated to a maried woman las only a Iong u the maria. Lack of collater cramps women's access to credit, and most credit bltm stilll requr written conset of the husband. Lack of sufficient labor input8 can

129 .116- al be a significant baraer to wom In agricultre, especially for hade housolds. Women are e d to inheit oy 20 pcent of their husband's este (or proportionately les, Ufe bhad more than one wife). Although the law excludes propety acqurd or held under cusomay law, widows are often faced wm 'propety grabbwng by ohr redatv of th dceased, leaing the wiw and chldren des ti Labor leslation inended to protect women fom hard and dangers labor Such as mines ort nltwork In effect exclude women from areas of ga employmen Not beo die, the Employment of Women, Young Persons and Children (Amendm) Act of 1991, awaiting Pmidenti asset, allows women freedom to work in any industry. In the 1ifoma tradin setor, women have difficulties in obtlg rtail licenses, forcing them to sell llegally. Womr seem to benefit less frm education. Although primr scol attendace almost equ among women and men, the attrition rate in the fhinl years of pdmary schools, and the high faiurer of women in the entry exam for secondary School, retuce femlo prcpi in secondry education. Domestic presures ad lack of finance are among the main caes, but some 2 percet of the women are expelled from shool each yea because ty are preat Economic growth shod increase the tax base, allowing more stable spendn on social Sectors. Demad for health and nutrition services will be reduced as higher incomes Impre diet and saniaton, and thfereforeduce the need for Isd care. However, the chalenges facing the social sectrs over the long run are dauntig The mc impct of AIDS could be profound. he epiemic teatens to ;:imin part of the most productve people from the labor force, clog hoeth care, and osde many &milies wth caing for a depedet, thereby reducing ther productivity and i aing the orill de nd e raio. In Zambla, a sample urvey in I Lu showed hat HIV necon among people with less than four yeas of education was 8 percent, but for hos with yas It was three times as high.5/ Ihe direct costs of teating one AIDS pate can be as high as US$631, and by the year 2000 may absorb some 40 pcet of publc health speig. Recen analysisugge that GDP per capit growth for 'tpicl Sub-saharan countries could slow by percet a year.z/ 6.22 Adjustme couid have a big impac on urbanization in Zambia, one of the highes in Africa Some of that urbanizaon, at least in the 1980s, was caused by the negect of rua sochi and the fworing of urban popu in the form of price subsidies. Urbanizion has put sovere pres on urb infrastructu, and has undemined traditional soci securiy arangeme in the extended village fmily. I the rural terms of trade incree there coud be slower (even reversed) rural-ur migration. This trd wil be enaced by the abolishment of uran subsidies and i ements I rural heith and educatin services. af Ai _ma haf od Mald Over,M gbo ooo k oq g Q All: Shoeks. _MM mod OeR APr PHN Dision Toical Woiklng Paper No 1, and the =efes giea in ths publicatbon WI Mud Ovar, Tmuam nnmijwad of AL S in ubhhuho tiua. APT PHN Division Teowla Woaid Ppr No.3, Wotd Book, ju 192, pp Th midpoint edim asume tat te Impat among te pma dul boms is higher, ana tat the d scoo of the epidmo half bamneod out of saip.s, thby rding te esources avaablo fo hnedmin

130 C. bmdfi ZambIa's 1990 populaon of 7.8 million is an Increms of 2.1 milion over th 1980 census. If Znbia's population growth ra remains unhngd at the curreat 3.2 percent a year, the popultaon wll double every 22 yearw. While under the Dank's rpid decline scenrio it would only double in about 45 years (see Table 6.1) W. Substndt pross against poverty will be impossible unless the current population growth rate can be reduced, and program designs need to take this concemn into account. Table 6.1: bululg PholeudauJmn)Ia De 1n e S cm arlos Year Standard Rapid Sbw As is common in counties wih hih frtility rates over long periods, almost 50 percet of Zambis popuadoin Is under the age of 15. In tradtional eoonomia, many chidre may have been an economic advantage to rural families by providing labor in the fields, but, in most cases, children do not increase produedon by as much as they consume uni they reach the age of Cuaetly in Zambia, br every 100 people aged (toe in the labor foe), tee ar 106 people aged < 15 and >64 who ae dependet on them, resulting in a dndc ratio of 106; compared to a dependency ratio of for dveloped couties. Such high depency ratios may strain a fmily's or the country' resources until e child complees her educaton and moves into the labor force. Populati momenm means that the nmbers entering the labor force over the next 20 years will t be vasdy difrent under elher a stndard or rapid decline scenio, but the differen will be noticeable after 20 years. Unless the numbers of those dent ar reduced, gains which mw be acbieved through larger mnbes e ing the labor forc will be ost Feiw P Ran Under Differen Scenarios dmard lawu Slo

131 Accordng to the 1990 cens, the mumber of children aged between 5 and 15 was 2.2 milion. ItstmpoirnttokepIn mind that theseme thesdhwolagedchildren, andan increa in hir numbes will have an mpact on the number of teachers, as well as infrauctue which will be requied-. bis nmmber would be dramatically different depending on whether a country WUows a standard or rapid feility decline (see Table 6.2), as would the resources requred to educate thm Dedine Sad Year sdas Rapid_ T High fertuity rates can mean higher morbidity and mortality for both mothers and ch e bcaus of too many chldren born too close together. High fertility rates also help determine to nwubers of females of child4baring age and the nmber of children who are under five years of age, the two groups that make the greatest demand on hoalth services. Depending on the deine scenaio (see Table 6.3), the demand for services would translate ito diffrent budgetary, health personnel, and ficility needs. Table 6.3: &em d Cbi A. Number of howu of eas-e( ~~~~~~~Dedhe S&e.arh ~Year Standar Rapid I I Nomber of undu_ _ I M S

132 Given the la number (42 percen) of people who live in utbareas in Zambia, If te, estimated rual/urban migration of 0.9 percent / coiues, the dmand for udbn sies c be gaud from the new dwelig needed. Cureny thre are about 620,000 udr dwelins, but another 400,000 will be need In the next decade, and othr S70,000 in thoa 10 yes (see Table 6.4) ffthe ferti decl moves at a stdrd pace. Ts woldd suggest an icee In demand for ubn evices of 150 pecent over the nen 20 Years- T. 6 i NeOe to Ua Ara-s,/ Year Stan~Ddard S Rapid S, , , , , Removal of governm subsidiks shoud, over time, act as a diincentive fr tho continud hib level of migration to urba area. Alternatively, people wil contine mving Ino ubn ar and tho nmnber of ud poor wll incase. In either case atten needs to be gih to the impact which policies as they currently exist, ar are ben considered, have on inentiv for migration witin the cuntry and how ths might tasla into "ft profile of the poor. D. 6.9 How sious is the ddet problem in Zambia? Will make growth impossible unless dratc and unpd rem are taken? Or wil Zambi stumbl along with enough aid and rlduin to pemit sufficie import for gwth? Patdy it Is a matter of perpecdve. On the dow side, Zambias debt servic burden i large and may inceas In the 1990s. In additon, Zambias debt stock, also large at more than six dmes the value of export, reduces c -_le! d a O. nhe o hand, doos (who are also the decsion makers for mwulatera is) ar unly to let the debt service burden strangle Zambas eonomic growth. It would invaidaot th money spento date, and the prospec of contnuing debt sevice witut gowth would not be good. ITherefoe, both Zambiand th don need tto rem pcs to work, and k would be unkely for the donors to permit debt service payments to ruin the prospects for econmic growth, provided Zambia cotnes a serious adjust_met dfit Mf Pbon1 aauuand lmlojb. PrWed unde d dircto a of NCDP. Novembr Sy Mm eidmnm an dedved oah a m_mpdon of fiv pople per dwling and do not t coaldeatn th ne to rplc any exsing dweling. Ino

133 Two actors cloud the debt service pictu. First, some of Zambias smutanta extrndalss b due to lte high debt birden f Zambia had no exterl debt sevic ites etenal would be much lower. For some donors the trade-off specific; exena astac iin Hle of debt f veness. For most donors, howeve, the reonsi Is more gea; debt sevice adds to need, and thi raises thke assistance needed to gener eonmic growt nho seond complicating fitor b the Inevitable shorttm crisis nature of flndi potei so utions to Zambia's debt problems. Th Is somehin In the dymic of the donor proc t produces solution to cris ht ae last mnu, short-term soludons with little or no reserve cushion, rather ta orderly and planned soluos t loger term issues with ample reseves. hi duo In part to the volunary reltions among the donors. Eack donor i relucta to take the extra step - to make the ao y concession - unless eveone else does so. Sine may donors fed they ar ardy doing more han their 'fi share', they do not want to do much more. Some donors (or other exten agent) may also resent the tratment of other donors. For example, bilateral donors wil not want to see hrge negave outflows to privat careditors even to some multlaeral agencies. Anoter reason for hes inetable dciffagers is that the donors are not prepared to make long-erm coneadm or pledges. In part t a Afuncton of ther own budget cyces, but t s also due to th uncetai In the Zambia prom ltey are prepaed to offer support only so lg as the pogram on track. TI means tha assistane and reschdling canot be on a long term bas The debt service projections in Table 6.5 assume d:ta (a) Pads Club reschedulings continue on 'Toronto terms', but the amordzation payments from th preious rewchedulings are not rescheduled. 0) A buyback of about $450 million in private debt is financed by donor p n W gmdm in (c) The IMP inae the stock of areas in two thirds with ESAP reouc and onhird with ordnay resource. (d) (e) New donor inds ate 80 percent grant and 20 percet soft loans. Non-Paris Cub bilater debt service is reduced in the same proportion as Paris Club debt senice The pae of debt servieo dt emerges is relatively flat undl near the end of the decade, when Paris Club amortzation and SIP rrcscauses it to increase shaiply bot as a prcetag of expoqs d GDP. To avoid increases in the late 1990s, the Paris Club woud need to rereschedule rplay of early reschedulings and/or the IMP wld need to find some way to lessen e net outflow of resources. The Pars Club has done this type of reschedling befre, but (iven the larg debt stock) a preferable method would be to work for more debt forioveness so that the problem is not just put off but (patly) elimned. Th IP would have to take ex al measures to make more net resources avalable because even evel assumed in these projections is well beyond normal access to ESAF for a country of Zambia's dsz.

135 Tn outr senao, di Inrs in debt srvice burden In de lt 19s does not prde cotadmined grwdh In Iora beaue we har auming rising copper pric at the sae te These hir c r prices may no mteria, however, ad/otr we may be ove emti the longe tem poteti for Impt comprsion. There, Zambia will ne to akb every eo to void dais Inc 6.35 Even In the yea of rdativdy low debt service payments ( ), Zambias debt seve payme represe 32 pece of tpots and 8 percen of GDP. Limited short-term ppe for cope prim mean that, eva wki hh growth of non-met expo, m wm not be able to grow by more than about 2.5 percent yea, whera we aro hoplg GDP can gow at over S pecent. Thus, hre wil be considerable prsure to conserve on impors. I das vionment dmes debt rvice burdens are l, and there wil need to be continuos efforts to reooduc hm Zam s sck of debt s one of h highest in 4 word, oa a per capita bai and as a pacenta of GDP. Even ff currt debt sevce b tclele, this oveang wil alwas reduce Zambias creitworthiness unless the debt stock is reduced. Zambia's projeted debt sevce payments 1993 (Intet and picapal combined) are only about 5 percent of the total stock. Tis aflect low itet rat and geneo raheduig, but I does not ailow much of a decrease in th stock In summary, Zia's debt problem is seious. The stock is etr hih, and is wil need to be addressed If Zambia is ever to becom c. projected flow is over 30 paern of exot, makin Import growth duifc (or in ohr words, offset much of th availableal ass ), and the debt service payment are projected to iase in the Lae 1990s unless excepdonal steps areke Second, actual outcome may be less fvorale If our esmates for such Impont fact as copper prices, copper outts, andor the feai amoun of import co _mion ar opmtwc. O tho other band, gen but not impossble levels of assistance and reshduig sbould pmit Impots to grow by about 2.S percent per year in real twes over h next five yer. Prvidd tr i no ned for mi Imports and with incraed effidency of Import use, mdest coomik growth should stil be possible. We need to search for more creative oluton and to pres r more genou treatme in the loger-tm if Zambia is to hav g oom to maneuve to bep on a susnable growth path Altoug Zambia is dch in naural esorc and has rotaind much of its a_ --I 1 P quality, tr are still significant problems. Economic dvelopment must be undertake with awares and, sotmes, must focus on repairing or avoidig environ l da to raise the security and sandard of living of Zamblans Th governmt has area tae some imota steps. In 198S, it completd a naon state (NCS) which proposed an Enmironmental Council. Zmbia also passed an PEotecon and Poluton Contol Act (of 1990) and creaed a Mistry of Einm ad Natual Resourc in 1991, along with a Nonal

136 -123- _vmnmd Council W. Mm Councl was form to bring together leades from various sors of the economy to ast In planing, moniotor d ensuige i qaity of the coutry, wie reearchng coordinatg and aviig on environnal problems nd poliies 6.40 le specific ftnctions of the Council include: Q) establihing pollution cortrol stndars; 0 Inves g suspected causes of pouuion; and (O sedect methods for polludon analysis Ih Counc wil creat nspwtr to develop standards for moiong, prevent polltio, and enoring mena planning, polluton conol and preveon. ls mdate mends to polution of watr md air, naise pollution, dips of hazrdu we wuse and mg of toxic substaces, erng natural resources, and the use of raiatvemtrals Mm. NCS has succeeded in binging unprecedented attetion of the public and g _VOMON to --1 ato_tental ias. Fis has helped to speci oniderable dtail on he goals and con e, nvirmnt al policy. Establisig a new government and coping with the drougt, howee, harpered progress n Nonetless, GOZ has requested Basn to delwdop tie NCS and its UNCED report Into a naional r acion plan (NEAP) ad to rlate k to an environmen investnt pln. While this is going on, It Is propd to dvo eironme support progms to address major priory issues Cleang for agdcult prodction is the leading cause of deforesition In Zambia. Population density in may pat of Zmbia i eaeeing sustainable levels of aditonal sgricue, which was on y sound, but i now leading to progressv MfO 011g1 and 80il dration. S taeoly, small and law scale commci Ming a addig frther press on resources. While farmi has become more input inwsive aound main ura cent of the Copperbelt, Ls, and along the linof-ral, whih shod hep rduce t, he use of falizes has Increased acid soils and reduced crp yie. I general, the sosls of Zambiare moderately acidc and are not well suited for longtom fetlzer p -icato 6.44 Moon than 90 prent of the urban populton depeds on charcoal for ts ener neods. Woodid I ao an iporta Input in fuel-cured tobaccoocing. Mhm problems of shr kloc swpply and rulting enir e degradation are heaviy concentted in the ceta 'spw of th country, especily in Lusaka Province where coumption outstrips produc n by nearly 300 perent. In Southern Province where the figure is by 23 percent, most of is aggapt woodfbd supply is consumed each year, and Lustab Province also ha a serious decit Soures of woodfel aro beooming progressively more distt from these centers of demad. Consequety, prices increase with negadve impact on income and food sct of tho urban poor. Mmb oflfcouall ad 4pofiodto in de to _peiof 1W mlad, 2 ueso h5 laduig zeuunmlvu a 4 olhr In addio to Its c an d ve-hrpson.

137 Loss of wilife aother major nproblem. As f and ra land come unde cutivatin, wildlib babias lost. Poaching Is common, even in designated tioa pas and It Is the pimary cause for wildlife depledon and has broug many mammals, reptiles, and birds to the point of extodon. Piot participatoy appoac to wildlife and poching control have been made wit NGO and donor suppo 6.46 In- miea erction, tho liaoge betwe mining and occupadondal th, nd ar and water poluton deserves vigorous Invigation, paicularly now that privattlon of miing is beig considered. Purthemorethe is as yet no legly obligatory impact assesment and scrng of projects and tochnlogies Pricing policies ad subsidies also have an effect on the environmen Jn Zambla, dur are no Inentives for evironimentally susable agriculture. Pehas the mst profound influec on soil ces has come from maize and ftlizer priing. Feizer susdies ecurag high rt of us. Newly all feriize usd by farmu are applied to maive, which commads the most favored posio in the agriculture sector. his has stifled dhercn into alate crops, even though most of Zambias soils ar more narly suited to acidtoler crops ConDti culivaton of maize rapidly depletesoils of nutrients and rtoratio of ftility, through the us of ferdlizer, becomes nessary. Unfotuately, most ferizr Is not opimaly wd sad In some areas it ag soil acidity. While the acidifyn effe of frtizer can be ueaced tnugh the application of large amounts of lime, smla holdes do not generaly ba access to lime Inret rate subdies hve also encuraged co_mmei famers to enpgge In prctces that lead to soil d and erosion. Becaue rates have been lower ta Iftion, comm id farmrs have been encouraged to take out loans and hivest in farm mchiny. MeCad ed clean and ploughing of fields reder soil more vulnerable to wind erodon ad leachin; reduce labor reied for land preparasti creatig unploymt and accelerate deforetaton and, someimes water erosion. Coupled with leaching, heavy use of fiizers has caused chemical seepage m coamination of wate resource. 6.SO Unfortunately, Zambia bas not produced an overal legislative fir nework nr a long-tum poliy on the envioment Eronmenal manment is scaered amg wrio Isiuto. ITe major batio a weak due to inadequt staffing and ihtd finacil resources but the NEAP process and is reed Investm program are expectd to address major evomntal isues In Zambia. F. ubl 6.51 Zambis health india have improved considerably sinem. Ovr the pedod , crude bith rates fell from 51.0 to 49.5, crude death rates fom 19.6 to 11.7, and it mortality om 259 In 1950 to 97 in Lfe epecyancy at bi for both men and women rose from 43.4 in 1963 to 50.1 in Health saevice delivy also Z/ aemo f60o ofrki ouwauao fo 90% of di maut.

139 The deterioraao ion the quality of care is also reflectd in the health statistics. Data from 1976 to 1986 Indicate ht incidence of the most Impotnt diseases are increasing along with case fatity ratesll. bls suggests an inasing demand on the system at a tim of falling funding. Case fality coud increase becaus treatmet of diseases is becoming poorer (no drugs, unsanitay facilities etc.) or that patients are not seeing treatment early enough. This Is probably compounded by the gealy poor health and nutrition condition of the population caused by virtually non-eitent prevenive health care services and the general fall In incomes Most recendy, the newly-elected Govrment has put fonrard a national health stat, to provide Zambians with equal access to effective quality health care as close to the family as possible. Goverment has idenfied the following key areas of reform: Improvements in management of the health care system; clear accountability and responsiblities at every level; regular review of the system; enhancement of the client's role; strenghening community-based health care supported by heath centers; maintaining the role of public hospitals; ibng private sector strens and reso ; quaity improvemens and increase in treatment efectiveness; and a broadening of the range of professionally rguled health providers, and imoemen in condit,ons of service The recent policies are sound, and the seriousness with which these are beig followed is heartening. In particular, the development of district-based health care and the commitment to cost-sharing have gone beyond rhetoric. Of course, the speed with which these policies are being implemented is not without pitfalls, and it is with this in mind that the following observations and recommendations are made While health service delivery to an urban populaon is less expensive tan to a rural one, the rapid urbanization has placed an increasing burden on the urban system. Moreover, the increasing size of unsanitary santy compounds has led to overcrowdg and a rise in cm nicable diseases (such as malaia). Population growth has also exaated the Government's ability to provide the type of quaity and equitable health care envisioned after independene. The ineest of the now Govement in addressing populaton issues makes this a unique opportuity to define and implement population policy. In addition to the family planning services provided by th Goverment, two NCOs have been involved in these activities: (a) Plamed Parenthood Association of Zambia (PPAZ), through support provided by IPPF, has been a leading force in motivation and service provision; and (b) Family Life Movement of Zambia (FLMZ), backed by the Catholic Church, whose emphasis has been on natural family planning metods Growth of sexually-transmitted dies, prmnary among them AIDS, has been alarmg. However, the AIDS sentnel survelace system has broken down, and there is little but anecdota evidence on its spread. Most beds at health centers are reportedly taken up by AIDS and ADS-related cases; flgures as high as :50-70 percent of medical wards have been quoted. Studies in two urban centers (Ndola and Livingston) show that roughly 80 percent of all patients in tuberculosis wards are HIV-pos itive. SU Caseo fatality rsa of dings fin te aie of X it th da thtd, LC., Indian of the da of dyiog ker any apseiflo diusas, zonc it las boco contatd. t i a

140 ealt FWanen: ovw ment ha nouned its ntent to improe haft care quality by (1) InasIng the efficien of helth ca prviion thogh In mangmet and d u(2) encouragi privde sector involvement, and (3) Iniating hat Insurance ad costsaring. As It stnds, Goveme is the major (for most the only) provider of heth services. As a pecente of Govement budget, howes, the Ministy of Healt as r received more than 10 perce since tho 1970s (see Tsble 6.8). Able 6.7: EE MFAIR DIfURI 1iE&192 HEALTH TOTAL HEALTH AS GOVT XPEN- PERCENT EQN- DfrUR- OF EAR DrTURES ES TOTAL COMPONNTS OF HEALTH EXPENDTrES =met) PESNAL CRAM CAPMrAL RECURRENT EMOLUMENTS DEP". 16 W53A Terw Care: As in most Aican counties, Zambian expendiue on teria health ce haa dominad tho secta. La's Unlvesb7 Teadhn Hospi (UlT has take a d i shd of av_lo resouc - 20.S peent of al health spendln in 1991, up fiom 16.S percet in e taching bospital fnco as the general hospial for the city and not (as orgaly planmed) a nadonal refer Intiuton becaus there are no genera care hospitals in LIa, and redavely few clinics and heath ceters. In 1988, UITH accounted for 81 perent of all hospital beds in Lusakl and 74 peacet of au hospkal indent days. A one-day swrvy at UT showed tha 9S peces of in-patieas In the medical ward were from Luska, and only 10 percent had been rered from other Intutios. Alto Itlly enisaged as a 600ed hospital, UTH has grown to a 1,835-e. Management and hve bome extremely difficult, and UTH has become the heat ilstuton of last resort for many patients When compared td the ZCCM mine hpils (some of the best in quality of care), UTH has higher ut costs, and much hir costs than. central referal hospitals in other countries (able 6.8). Condions at the other lare ur Govmet-n ins ions are so beter, and may even be worso. Mhe mines hosptls (ZCCM), as weu as tho heal Itittons unm by church msions, hav operatd as the f hargn refde facilities in Luaka, but with few exceptions operat at less than SO percen of caciy. Pdvates sctor abtaves in health care have not been encouraged until rcenty, leaving to Govenment as the mai provider.

141 in - v10.~~~~~~'

142 -129- betwn awareness, expressed need, and contracetve usage could be patily explaied by the low (and declining) availability of contraceptives. USAID, the main provider of contracepdves (60 percen of the country's needs), has phased out lt fmily planning acivies, and wijl only be prviing condoms through Its upcoming AIDS projec. UNPPA and other blated donors have attempted to meet the shortfdl, but no data exis to indicate tde degre of success AIDS: Availablo data suggest t incidence of HIV and AIDS in the population is high and an the dse. Most have heard of AIDS (98 percent, according to the rent Demoghic and Health Survey), but litdo bdiochange has takplace, not least because only 20 percet of the population believesomething can be done agait infection. Prevention is a highly effective way to icrease discounted healthy life yeaars./ In additon to AIDS, the bigh incidence of sexuallytransmitted diseaes (STDs) needs to be taied Urban Bealth Status: Although much is spet on urban health ca, the results e diappoi, due to nfficindes and higher needs in urban areas. Urban districts have a hiher incidence of diea, mesles, acute uppe respiratory diseases and sexuallytransmitted ise ncluding AIDS. Commuiy cohedon, especiay in fastgowing perurban ara is low, i _ning the need for prfessional care. Given the nat natou of private health care, atenatvs to the major hospitals in ua aeas re few, especily for the poor PretI" and Curatve Heaet Care: Since 1981, eftfos have been underway to move towards more prevtve heth care. Although education health care and hygiene Is essential, th avaabilfty of clean wat and sewage and waste disposal have been idendfied by many commuities as moor d rminn of well-being, particulary In the pei-urbn cmpounds. Preventive care should be one of the focal points In Gornme's Health care decentralation policy. Development of outeach services, especially In urban commuities, should be more cdealy articulated becae it is essential for lnking the health system and the benfiiaries A deady articuated saegy for the water sector lackig in Zambia, is necessary for impwovig health. Donor-financed fil studies and workshops have identified the necssay steps, but Government has not taken action yet Family PlanM g: While a Populaion Policy was adopted in 1989, not much progess has beeanu in Putting it into acn The Governm has stated that one of Its means of achievig equity in heth opportnies will be toh hesifid famiy pling, and the opporuity shud now be seized to move forward. 'ho plnned implemeng agent for family planning should ensre ht roles of the relevant sectors (hedth, education, agriculture, labor, and inmation and broadcasdtig) are clearly articulated. In addtion, ' Pmwvaitg a acs of Hm invfvt saves 19.6 disoouned hafty yeare, as comped to 3.7 yas for P Aig or aeting mahla So== Ainwouth, Mat and Med Ova, 2M.eo_minwant of AZl: ahjibj ap QntiOu. APr PHN Diisin Tea Wokg Paper No 1, p. 4.. S Gea.y hroh t GIM

143 -130- Govamen should coordinate with, and involve eistig Naos to wmprove contraceptiv prevaece and wc. Governent should use the 1992 DHS as a bas from which to coas is knowledge abouthe gap between current use of ntracepdon and the apparn unmet need. Morever, the possibility of inteating the delivery of family planming services into he moaral od hild health progam must be explored Ih Govenment neds more acurte Ifomation on AIDS. Tbis b needed In order to assist in the desig of an appropriate method mix for family planning. Ihe lack of behavioral chage suggests tat information, education and communicadton ef nad to focu on the men of transmitting AIIDS, and on the increased risk for those with STDs. Wh the socw and eonomic impact of the disease already being felt, there needs to be a conceited eo by the Goverment and donors Helth In _uae and Cost-Sharing: Ithe Goverment has been vocal in Its auempt to intiue some kind of cost-shaing by cliens in health care. Limited user charges have been introduced, and health iunc is being explored. With more tham five perct of the population in formal wage labor, isrance schemes are possible. However, introducing tm wi quality improvem In health came will be seen as income reduction by those who bve to pay premim. Therefore, a careflly worked out plan of quality improvem must accompany y scheme. Morec;'er, such schemes require carefil design to conain costs. A combination of insurance with user charges offers the potential for wider acces and mor resources for health care, without unchecked cost incres The role of user charges in raising resource should, however, not be C b 0 e 1!It he most successful cost-recovery schemes in Afica raise only percent of health careost. However, charges n and should play a prominent role In the ratonaiation of health care, with differential charges at diffe levels of care (for example,.inpnsive/free primary health care versus expensive terdary care), and for different es _ olem 15nexpenive/fee bic health care package ve expensive advanced treatment). he introduction of user charges needs to be accompanied by mechnisms to exempthe very poor, combiing it, say, with eligibility criteria for Social Welfare ebiliation of Physial lctudes: Although faclities per population indicate that Zambia is bettr off than neghborn counries, many fdacltes are In a dire state. Reocft fiue show that under the Social Recovery Project, communities were more likely to request the ehabilitation of schools and health centers than any other maisted activity. Equipme at hospitals and helth centers was more likely to be out of order, and repair usualy required scarce (or non-existent) spare parts. For example, 8 of 11 operating rooms at UTH were out of order; most health centers had no rehabilitation or maitenance in the pat decade. The Govemen's health reform plan, therefore, must make realisdc esdmates for the operton and of health facilities Hma Resouree DeIeopment: Staff training and deployment has been largely aid boc with ite or no aon paid to refresher traling and conditions of sevice. Morver, a sufficiendy broad range of health personnel have not been trained or deployed, due pudy to lack of resou and partdy to resisae from the established corps of health persoel, especially physicians. Personnel planming and deployment is ovedy centralized. lhe lack of a mid-level cadre, similar to Assistant Medical Officers in other counties, has made Zambia's depedece on physiciams too large. acinica offices few and ae often

144 -131- put In crge of heat cente who adequat trainn. Nurses often called upon to dipensei evices, ai Wwit prop ftrin he prposed health eforms will have a big Impact on all health sector pesonne. Disc managei and accounting skls ned to be developed, and supervision and aditg sil at the pwvinca level. e Ministry of Health sbould phae out Implem responsblis, ad devdop planing and strtgic caiqty A humn souce development plan Is essential, and will requie quick fruaton and Impi n for the halt refoms to be a suces. Recent effor to downize psoxel avconcentrated on reducing the number of conutracted daily eployees (CDBs); ths nether reduces the wage bil significandy within tie sector, nor umak the secor more efficleel Often these CDEs are providing what little maintece and coda care Is avable. Therfore, any pasonnel reduction effortsholdd coincide with ourent and future neds Phirmaceutlcals and Medical Suppiles: Although Essential Drugs system is a marked Improvem t, has flaws which must be addrsed. First, its coverage of uba and perba areas has been patchy; to number and mix of medications have not been sucit to ove demad. Second, it has not Icluded contacepdves in a sysematic way. The only contraceptves distributed thou the kits (condom) are not cousitnty avao. Recent defts by tbe Swed and Dutch government and the EC wil result in th upgradg of quipmet and supplies in most health centers. Governmet plans for the fmture must tak it the account the reuret cost implications of maintaiig such provisions once donr ds are exhausted Urban Master Plan: Unless the Goverment makes urban halth caro more ficient, t wil contne td consume a dispropordonate dse of the country's resourc. Giv the apid grwth of ped-urban and utban areas, Govermet must implemen a mastr plan fr urban health care which, among other things, would downsize the large urban h pals (esely Ur3T ad Kttwe) and provide car as close as possible to the This would fit with the MOW's plaln for deentralti h growing role of the prvate sector is also a impota part of any plan, as are the neds of the ru areas. Since rscs wi continue to be scarce, prwvision of adequate care to undererved popultons should remain a prity De (lmprovements In Management, Planning and Budgetng: Although much thinki has gone into decentralization of the health sector (fiacing, plnning and budgeting) to the district Ies, adequae attention has not boee paid the changing and ever- t role of the provines. Nor has much thought been given to the functo of the cental MOH, although the Mister has been clde about coiderably downsizing the MOH. Thls has to take into consideration the current and futmur needs of the sector, and pl shodd be made accordnly. G. Edu 6.78 Maco-Eoonomic Linkages. Education is a sine qua non of economic develo ; it catalyze and sustns ecoomic growth and reduces povety. Government rn_iz that tducation is centra to economic recovery and has put the revitalization of the education yteam high on the reform agenda. This will ensure that the human resourc base

145 -132- continues to grow during taion and tht k wi be sffiey sm to sustain ecoomic growth aft covery. In additon, investmet in education support adjustme becoa th hwiy visible rov in, and hicased acces to, educaton wll directly beneft the poor, who ae often negtadvdy afcted by the short-trm effes of adjushment Treds In Bduato Developmt. Betw 1964 ad 1990, erlmen In prmary scools Inca fouradd, grwing at 5.5 porcen a yer, and secondary school enrollments Ivcreased more than twdve-fold (mare t 10.5 pcet annually). Jn 1990, ther wa space In pmary sdbools for roughy 9 of evey 10 children of sdhol-goi age. After 1985, howwer, much of t*hoe e In enrolet was the result of Increased cla szs and double iple, and quadnrul shifts. No only did ths put undue ste on the physc Zades, it also reduced the number of hour of cona stu had with the nstructon, ad eroded the quality of educati offered at prmary lovd. By 1990, only one of every four primay studes could go on te secondary schol. At the end of 1991, the fomal education system comprised some 1.9 million individs: 1.6 mllon prmay scho and 220,000 secoay school pupils; 4,600 anding teache t colleges; 7,300 university sdents; and 34,000 primr and 5,500 seconday school teachr. In addion, ince the ate 1960s a policy on tehical and vocational raining has been In effct; fomd prserv and evie trainng i offered In a network of technical nstuons at t craft, tehiian, and technological levels Because the maximu capcity of the school facit wa reached in the 1980s, men hav slowedown comiderably. Pdmary school enrollmes icreased by less ha 10 perce fom 1985 to Mhe deeioraio was even more marked in Grad 1, whe enro_men grw by more than 35 pecent in , but by less ta 4 perce in Mme average amnual grw of Grade 1 enrollments was only 0.91 percen in , at a time when the population gw by more than 3.2 per a year. As a result, after two decade of stedy grwth, the gros ellmenmt rate in primary schools has sho a downtn in 1985, and i almost ctaiy stmi delning EdutioDn randg. In Zamba, ther is a huge g between the need to prvide broadb access to quality education and the reources availble to meet hs need. The undedying cause is the heavy dependence on the Stae for most education finance duing a peod of economic decline, coupled with public e di p olicies a dierted resouces away from the social sects. Th reduction In educaon spending has bee msive, tesultg in a decline in quality at all levels of the education. Moreover, ditbuton of to ducation budget b weitd too much in favo of salaries and stdt welfam, crowding out quality-enhancing Inputs, such as learing materas. In 1991, saades and allowances accunted for 97 pert of speg n primary educon and 65 percent for secondary educaton; another 25 pcet of the scnday allocation covwered boarig costs. Primy educatin has suffrd the biggest decli ne on _ 1, and there is an inpver ationshp between In pdmary educaton and the growh In enrollme (see Fige 6.1).

146 IOur6.3 Devetopient lof iay School ]znrolmants and Exuenditurs lenroflment.enrollment ISO so Efto1Dent in Thousands Expenditure in millions of 1985 kwactls 6.82 Qualty and Access. Schoolsuffer from a critical shortage of esna leanin m.i the main urban areas, the pupiltextbook ratio in primary shools i 1992 was 8:1 In mathematics, 5:1 In English, and about 20:1 in social studies. The sharp cutback in pending virully eliminabd new investments In ant/or rehabilitadon of eistg nfrastcture. The result Is overcrowding and crumbling Infstrcture and the closure of many shools during the rainy season to quarantine against cholera Enrollments have fallen to about 85 peret from a hih of 96 percent in In 1990, the adult iltacy re was 25 percent, with the rate for females at 33 percent, and the number of fictonally illkerft aduts I growing Educaton and TaIng. herae no skill short in key areas, icluding ming, health and engineering. In 1990, these were filled by almost 3,000 expatias. As the economy becomes more market-oriented, there will also be a grea need to retain the labor force. The Fourth National Development Plan proposes to (a) increase student enrollmens in some terti educafion and training insttutions; 0) strengten teang of science and mathematics; and (c) involve industries in funding through a training levy Govement Strate. Prudence In spending and judicious use of avaflable resources is needed to ensure qualitative and quanitadve Improvement in education. Government is giving priority to prmary education because: (a) unless this foundation strong, more resources will need to be spent at higher level of the educadon system; (b) In the foreseeable future most Zambians wil not go beyond primary education. It is important, theefore, to eure that the quality of primary education i strong enough to sustin permanent ipteracy and numeracy and to help individuals impact on their environment; and (c) primary education has been most severely affected by the decline in education spending.

148 A Ed=tory of RAUhae ad kh~~ab oaono S _In Zambla : licy regime 1 xed xchange rate vis-&-,is dtl : At Indepedence 1964, the Zambian pound was linked to the pound sterling at pariy. In 1968 the Zamb_a poud was teplaced by the kwacha at a new fied set at ppy hf the old rate: K1.7=IPS (KO.714-US$1.00). his *fidchgetwmntainedm dll 1971 when th kwacha was deld from the pound steling and tead ded to the dolr at lbo ate 1KO.714-U$1.00. At e sam te exchange control wer dghtened in repos to th fall In ope Prices and tho declie in foeg excage reserves. In Febuq 1973 te kwacha was reaued by 10% td K0.643-US$1.00. From 197S to 1977, th kwacha becm increasingly overvaued due td tem of trade declies and th facta it w a d a fxed re with an appreciat dolar. Th ov uao was rflected in e divergence be ficial and parallel ma tes. Due to the Instability of the dollar Wollowing its swich to a floatg exchange rate, the kwacha was delnked from to dolla and ded td the Special Drawug Rghts (SDR) of the Fund at the rt of SDR1.08USKI.00 In July Th excdhange ra did ot rilect the tue sc y value of feign exchan. In fact, the paralld market premlm almost doubled over the period from 1.3S in 1970 to 2.46 by Consequently, Imports were aicially dceap, and odmbined wih extemey high protection, cessdvy high Imrt les reslted : Polby repme 2 (lwked with SDR): Th sitch to SDR In 1976 mared a 20% dejfcto devala of the kwacha. Betwee 1976 and 1983, he exchange rate Wd i by a against the SDR. Two fiaer devaluao occred duinag ts dim period-h 1978 by 10% and apan in 1983 by 20%. The kwacha appreciated agin l term betwee 1981 and 1983, because of the rapidly apprecatg dollar whic had a large wght in ie SDR baskel 3. IM : Poly regime 3 (lne with bsakt o currenies): In July 1983 a mqor switch was mad in the change rate regime from the manad float to a crawin Mg, basoe on a baket of the ix cuncies of Zambias main tadg partner. I excn rat was to be magd by monty devauao of 1S. Ti was lateased to 2.S% a month in TIs policy of steop-w dltn ed in steep declies in the value of he kwacha from from K81/$ at the year end 1983 to K2.2/$ by Nonhelmd, tho nominal deeions eenally just offse the earlier ra qecation of to kwacha. Lat In 1984, an export retent seme was nroduced whereby nonetraditional eorter wer alowed to retain 50% of thei export earni to be used to pucae ir Importd inputs. The export eanigs rentio coul also be used to buy back Zombias com rcl debt at a dicount A marke in ret d en quicldy developed and fmnds In thi maket traded at a rate higer t the official rate S41.2: Poli regime 4 (Mare suctions): As part of a copeh refom pacwage, to current account was liberaized in 198S. In October 198S, a maketbased d of _tbd the excang re was eablished btough a z_ft _o zgm..

149 mievon (see bo). ThIus under the ation both the exage a and for allocation were largely market-dete. This marked a significant depatu fiom prevous exchange rae and foreign excchnge allocation procedur. In addition, the parallel market was formalized defacto by the govments allowing Imports to be purchased using own fimds (or -no-fnds from the Bank of Zambla). At the beginig of the auction the exchange rate vis-a-vis the dollar was K2.2. In the vray first auction, the kwacha depreciated by 55% to KS.01/S and by the end of the first year of opeation had furher depeciated 66% to K8.30. S. Starting with the 43rd aucti the Agcton was introduced by the Govenment. I was felt that bds were excessively hw due to the fact the bluders did not have to pay the actual bid but instead, the mnmal bid; consequensly the kwacha was being driven down much lower ta Its 'true" equilibrium value. Under the Dutch auction system, bidders had to pay the fill amount of ther bids if they were successful, and this amount was then surrendered as goverment revemnu. The kwacha contiued to depreciate, however, and the auction system was suspended In J&.uary 1987 after the 68th auction. The kwacha was revalued at K9.00 and a two-iet auction was intoduced in March Under the official window (applicable for essenti imports such as fuel, maize & fertilizer, debt service, and receipt of loans and grants), the offial exchante raw was fixed at K9.00/S and detmined in refere to a basket of currencies of Zambia's t pares.v The official rate was allowed to fluctuate between narowly allowed bands: K9.00-1K2.50. In the other window, ths MedMdWMiWd exchange rate was once again the marginal bid that ehausd the avalble fo exchang put up for sale. The two-ier market lasted five (further) auctions; during the fifth on 24th April the kwacha fell to Rs lowest historical value (at that time) of K The auction was subsequendy abolished on May 1st.a/ 6. Figure Al presents the monthly parallel and auedon-detemnnined exchange rates from October 1985-December It Indicates that in geneal, the auction was successfil in reducing the size of the black market. Ite black market premium fell from 168% in mid before the auction was introduced to 70% by December In terms of achieving an equilbrium exdhange rate, thoexcge rate was at an appropriae level during a signficant portion of the aucdon, but may have been undervalueduring the later stages (fourth quarter of 1986 and first quarter of 1987). 1I Defined by the Bank of Zambia as theo bwe bid fully mxhausting the amount of foin exchange offerd at that paxdcular aucion. 21 Thcunes comprased the US dolar, Bribh pound atling, Deute ma*, Japanese y and th Prench fra. I A ulah autow hed to alloct foeip echng at dt rae of K15.00 bbre th shut-down of opaion.

151 L90s Poc rgle S (FWied xchnge rate): Following the collaps of the auction system in May 1987, many of the exchange and trade liberal on mesures mplemented in the pious two years were reversed or dtghtnd. The kwacha was revalued on agaln by ovr 160% ad verted to a flxed exchange ate set at K8.00. lhe Govament retuned to an administratw allocation of foreign excog through the Foreip Exchange Magement Committee (FEMAC). W;th respect to the reteton scheme, porte were now reqed to nitially surrender all thek fo earnins to the Bank of Zambiand obtain FEMAC appv with respect to Its usage. Moreover, reteton usage was retod to tho purchs of Impord inputs for the exporter's production process. The pwarl mart rd Immediately, with the paallel market premim rising to 133% by uliy. 8. Betwen May 1987 and eady 1990 the official kwacha rate was adjusted thwouh.ldm 1dO 119as follows: by 25% to Ki1 in November 1988, and 60% to K16 in June 1989 following extensive policy dwogue with Bank and the Fund. The previling high rate of infhaion In Zambia which averaged 103% between , however, mea tha these modest noinal dweuation did not keep up with inflation. Consequently the real exchange rte appei from May 1987 to mid-1989 by 57%. A slight depredation occurred thereaft. Startin In 1989, however, the retention scheme restricdons were relaed, with elimiato of the FEMAC approval requment occurring that year. The reteant shme has been progriy liberalized since then and thus has become a better hiator of the extent of the in the official rate. 9. iwley reglae 6 (Dul exchge rate systems): A two-ter exchange rat system opaxtg though two windows was re-instiuted (on a transitional basis) In Pduay The aim was to reduce tie dicretionary element inherent in the FEMAC allocan system and to have the official exchnge rate approach a market-determined rato by mid-1992 trugh a sies of autments. 'he fltwindow operated under the official cnge rate nity se at K27.80-US$1.00. All forex eared by ZCCM contned to be allocated adminry at the official rate and was expected to effectively serve as a credit caai. In addion, all foreig cuncy Inwad remita received by diplomatic missions, caritable,adoganiato ns was to be pur eat tho prevaingfitwindow ao. A sepat" markt rato was applied to sod window transactions and was iniily set at K40.00US$1.00; this e wa considered to be close to an equilibrium rae. All eligible ImportB under the Open Genal Lceense (OGL) were obtained through this windo which wau famded prmary by no onal export eaning and donor balance-of-payment support; ohr soes of finds included forex earnings from hotel and other touist and prvate foreigp invesent, I addition, any individual could sell foreig xchang to dt second widow on a 'no-questions asked bas. Intly, the number of goods eigble for Imports through the second windo was limited (roughly 10% of base peiod impors) and conisted of key imported indust inputs neessary for productiond spare Pa. h windo w, however, gdually expanded til approximaely 90% of import aegories (cluding fuel and ferilizer) were covered by the OGL. While the official r wa gradually adjusteduring 1990, the second windo was held at K40 through From October 1990 onwards, the exchange rate at the second window was progressily devalued with the target of reaching K60 by May The official and second window ras were unfied L Aprfl 1991 at Y58=US$1.00.

152 ... R, W!

153 orli Itifp'I I~~~~~~~~L.~~~~ =carii5 [I

154 Aucdon period (ate 1985-arly 1987). In 1985, far-reaching trade reforms were Iniated. Ite imt licensing system was dmantled, and a mark*et-ermined foreig exchg allocation system was Itoduced through th. market auc^t. Import bans on severalm were romoved. The allocation of forex during the aucdon period was much fser and perceved to be more equiable sinc It Involved fewer discretlonary decisions. Bids put in at ttie Friday aucdon were likdey to result In fore exchange fnds avabe for the bidder within seven working days. The private sector, on the whole, appears to have been satisfled with the system. The Incidence of overcharging of Zambian importers by foreign suppliers to cover the unceat and risk Involved appareny dimnished. 14. Table Al presents a breakdown of fores allocation across sectors during the auction period. The manfing sector and pstatals received sizeable mounts, both absolutely and as a share of the request amounts. In genea, the auction favoured companies that were highly liquid and with the capacity to borrow. Thus, the agriculre sector, not surisingly, obtained a relatively small share. This was linked to lidity problems on the part of the sector4/ Maize prices were still controlled and thus fms could not pass on the higher iuts costs resting from the kwaca depreciation to consumers. Table Al: Soctor allocation of anehanno dug th. auctign. Wbs t (October October 1986 (US$ milions) Requesb Alocation % of total (UJSS mu) (USS mn) forx auocation Agrcule private MAnufacturIng Pastals Other Source: Compiled from PD. Noube, M. Saa, M. Ndulo, 'e IMFP and tho Zambia Economy-A Cas' in IJef J. HBavuk (Ed.), lbe IMP and th World lak in AfI The auction supportd a significan increse in imports of intermedia inputs and capital goods partcularly dung the first half of the auction period (see Table A2). However, for the auction period as a whole, this did o translate io improved manufacring sector performmce. Some of.'ie reasos put forward are: the Inhere Ltabilty in the auction made business planning difficult, and inadequate kwacha funds hampered many firms from bidding successfully. JI See Ndulo et. al and based on ds _ssion with Zambian offials.

155 * Table A2: Algetio of eexche by te of tod Wek -1-2 CQ _RMW Ibnudiat Machiny a Equipmt 53.6 IS.7 Goods Senices" llocatlnto Batihk Souo: Compiled f*om Ndulo at cl 16. M. thd and foufth quarters of 1986 marked easing dquibrum In the auctin markel As a rest ohe govenmnt offring more foreign exchange on the auction tad the avaibl supy, a ppei of ares built ud (see Teo Box Al) Poq reversal. 'Me couapse of the aucdon in the second qua of 1987 marked the retn to an admid method of foreig allocaton in the form of the FogEchag Magemet and Aocation Committee(EMAC). Moro wa required by imqxrr under FEMAC;6 this lenghend h time It took to obtain freig excha. Table A3 presn sectora breakdowns of *reig allocation during the FMAC peiod. The I sector once again obtaind the lios shae, rcevg ruhy 50% of hio man FEMAC allocatdo on averag from kt appears tut most of this allocain wt twards idust raw materials and spar pats. TMe system w cery biased towards te psls. In ton to the specfixclusve alcaions to th,m, the p received 48% of tota FEMAC approvass over the cous of FEMAC operations.2v FEMAC woun down opeaton in November 1990 and was replaced by a tr tona scheme involng two windows as sources of funds. it nw oeto obti *Dp aqe, impoutn ba to submit an to FBPC bedo, ha Inpot lme coud be Imued The cmmerial banks wud mubsequmtl open a lowte of areit. All financia aun9nsomwa betwee oua*u and fep alsi for Uho sp* of oodsa an cdit had to be apprvod by dh Bank of Zaida Zl Cram AamtaApmat

157 -144- SUMMRY MC,NUR AM2N=NA OgI 1. The outlook for non-aditionad pert presented bdow was created *fhom the botom up aalyzing tho m4jor eport products ad creating growth scenarios for each of them. Tables B1 and B2 below llusae the resulting base case and upper ca foecasts for tot non-raditioal export revenues. It should be emphasized that th upper case scenario is composed of best-possible scenaros fot each product category. It b unlkely that such a si_atio would meriae for all products at the same m, but the bae and upper cae scenaios gie a picture of the range of possibilities. 2. ITh sample Indcludes products which are already exported in substantil quaies and others th are not but for which growth prospects ar considered to be particularly promising. Cbined, these products account fo more than 70 percent of current non-taditional ept. Agricuturld products figure prominendy in curet expors and are expcted to condnue to do so because of Zambis pronounced comparative advantage in this field. 3. he sample does not pretend to be exhaustive, in part because entrepreneuri Intadve may lead to tho export of some sutprising products if an enabling envionment for exports I indeed.tablished. Silk caltue and the production of natia food co ts are just two examples of the kins of innovative product ideas that acy are be agtempti and which could be joined by many more once the environment Improves. 4. One of th teions in the Zambian economy t emerges str y in an anaysi of expor bewee the large scale producer (often non-zamban) and the small wcale Zambian producer. Te government has tradidonaly tred to promote the intere of small scale producers, although not always with success. Goverment has attempted to achieve this toub wd licensing such as in geamtone mining or by creatng a set of lti antd instiuo that purported to support small scale activitiesuch as in many of tdeo ariac commodities, altugh there were a few larger operations moslly wholy owned by the state or joint venr between the state and -usually foreign- private companies. S. For sval agdcltural products, a buying orgaization was creted to which the small scle opears were to sell their product and from which they were to receive a variety of support serces (e.g. LJNTCO for cotton and coffee and TBZ for tobacco). Inviably, the pdrcs offered by these buying orgnations ended up acting as a disincentive, the support srvices were inadeque If delivered at all, and financial mismanagement gradually eroded whawver efeciveness these organizatons may have had. Government has come to realize the failure of this pproach and Is in th process of either dimanding or privatizing many of these strucres. 6. As a result, may of the se are in a state oftransitiol As govenmnt Is &dimin g IUs involvement, some of the more mag operators may hae to drop oul In contrast, wndion ll mprove for the enty of larger commerci entities. And hybrid

158 - 14S - forms of orgnizto combining roups of small opaors under privat commerci managment smay gan in importan as well. An example of the latter ae the outgrower schem which ar prodcing nceang share of some of the eort crops. Ihey may not ahieve the yidds of lag scale commercw fm, but tbey are not s capital intesve eier ad by abig mall famerst ontinue opatng quad ndepedety, they may be mor In tu with th soc-eco no taditions of the Zambian agricutual community ta for Instance the tenan schemes vhich habecome so Important in neighbouring Maawi. 7. An ovrha of the la leglaton and the procedures for adlocatng land wod be he single most ImporWt conibution which government could make to support the growth of boi cmmeal fming and outgw schemes. In gemtne mining an overha of the ming lice sysm ad the gmstoe trading system coultd esult In curly unqualified and ecita idividua making way for more visble miners or possibly, nw hybrid w here formerly artisinal mins become shareholders In larger, more o*sdoila entities. 8. Lak* of fice and in pardcular long term finance, is endemic throughout the export sector. Lagr compaes are better positioned to secure their own fiacin or tap intelugood sources. Small operaors however, need to look elsewhere. Again, reform of the lnd legiation ad gemstone mining licensing system would give sman scale opets tes with which they may secaue fining fiom local banks. 9. he trnd towards reglory refm and trade iberalwzaion needs to be reinfored. here e stui g examples of govennt imposedistordons notably the situation surond aiht from Zambia which is preseny monopolized by Zambian Aiway in part becaus of govenmenteguato which reduce the atrctiveness of opating i Talam The export of flowers and hortiulbual products, two categori of product in which Zambia could ejoy a significan competitve advatage, are seriously hur by distorted ai f t. Eporter already have to overcome a competitive disadvantage duoe to long geograph distances from their main export markets. Government regulationshould not fardher undermine their etitiveness by allowing artificily high freight rates to persist. 10. Lack of exptso is another importmt obstacle to export growth. Satly, the gtining Insttion geey hae failed to deliver the kind of practical, technical and commeial expse that is so urgently required to support an exort drive. In those sectors where well sabd pdvat resentatve aoaons exist such as in gemstones, tobacco ad co cal farming, ways shoud be explored to inolve these asso as closely as possible,i organizig trining progm and managig the respecdve taining istutions. Alternatively, collaboative ageemet should be sought with training Institues of proven reptatinm elsewhere in the region or overseas. Meanwhie, those compades that are willing to Invest In acquirig expertse from abroad should be left free, and even encourged, to do 60. ItenbtaM foreign Joint veure partners -proven to be some of the most effective export catalysts elsewhere in the wolid- should feel reassured that there are no restictions whatsoeve on bring their own magement expertise in. 11. In addion to lack of finmce and expertse, a third and reated obstacle to export growth i te lak of e _spirit. For twenty seven years Zambia was govered by one pty and one President whose nde (despite many positive ahevements) was cractried by a lhumanism tat acdively and effectively dscouraged busess initiative.

159 -146- To got now entprs stted, a reu to th eneprneuria spirit I just a impora as IncrIased finan or imroed training. 12. One of the few n _readiy availabe to stiath eneprenei aciity I the Importion of nw entrprenes, whether they be famers, miners, manufa rs, or whatev. By way of example, a number of farms from South Afric and Zimbabwe hve don interes In f*ming In Zambia, and a hadw have come to sete. Tbis bandl could grow lage cough to become a serous influence on th expasion of commercia agricultr and the recovery of grdculural producdon. Excbange contol constait within South Africa and Zimbabwe however, act as a hindrance to emigration. It may be possible to etablish symm for fmers firom thes countries to pay for farms in South African Rand or Zimbbwe dollars. his would be partcuarly stight forward in the case of fam due to be pivated. For Soulh Africa, there could be a simple blaterl agreement for the agree purchse prie to be paid to and held by the Reserve Bank in Pretoria, to the acount of the Zambi Government. Thi currency would be available for Govermmet Imports or for sale tough the Bank of Zambia. For Zimbabwe, a comparable system =ood be established usi the PIA clearng house.

162 149 - ZAMBIA - NON-TRADMONAL EXPORTS GMSWONES 13. As in other part of Afica, the gemston mnin dustry in Zambia caa zed by the 'mssn mil'mhr ae two lagr sized ming companes, both joit ventus bmven parostatals, and fori intets, and a large number of small ardsan miners, but few opeo in bsetwa 14. Of the gemston mined In Zambia the three most importan categories emeralds, amethystsand aamaine and of the by far the most Important s emera. An etmated 80 pece of ll emeralds In Zambia are mined by one company, KAGEM whih Is 55 percent owned by the stae through the parst Reserved Mienes Coportlo (RMC), and 45 pece by a sml oup of foeig pdvate indiidus rerse by a holding company, gura, Lt Mm opeation e plgued by a high Incdence of ther and an uneasy relat between the public and private partners. The other larger scale mining operaton ishe Kardba Nmi Cortion (KUC) which speciaizes in the mining of amethysts. i company is a joint venture beweea RMC and LONRHO but is effecdvely controlled by the lat. As is the cue with KAGEM, it is widely suspected that the company's retd saes only repeet a fraction of its acual perf ance. No large company i involved in the mi-n B8 of _illem 15. Apart from thoe two compas, ther are seeral hundred licensed sal mirs and countess Idiidal who enag in gemstone mining without any lewn. Unti recenly, al aon mined by smll miners by law had to be sold trouh one of hee monopoly buyers: th Zambia Emeralds dustry LTD LEL) for emerads, Kaiba Amethy Mateting LTD (1AbL) for and RMC for aq_bua nes. Ie system wa inflexible with the buyers off prc well below maret level, payng primarily in kwachat the offical xcha rae, deductig commisksi and a meal expor tax, and In the cae of ZEIL, only accepig th h t grades. As a mult, most of the stones produced by small miners have been sold otie of dis foa system to a network of Illegal buyers. Ilegd as they may be, these buyers offe a servc to the miners not matched by the officia buyers, including better pdrc, paid In cash in had cuncy, and if the need arses, wih additional sport services such as ifmal cedit 16. Recensy, a govenmet directive lftd the monopoly of the three offical buyin but in te absence of an effetive mareting system, llegal sales bav contined as bdeo. An action systm been ntduced but It is questionable whether thsen coud be hld frequ y enough to become an attracdve altenative to the mines. Table B3 imua offilly rotdet sades for rugh and cut gemstones for the five-year pedod Estimates for toa actua sales vary and go as high as $200 miion for rouh emeralds alone. It should be pointed out, however, hat thes esmates r senthe saes as observed in theboi gemstone trading cent abroad. Before they reach these polntst h ston usuy hawe passed hogh several middlemen ad their prices may have inead sead fld. Be that as It may, oan can safey assume that the amount received by Zambla miners s wel above the amount offially reorded.

163 - 1SO fist licses to small Zambian miners wero Isued In SInce then, the governmet has mantained a policy of Issuing licenses to Individual Zambian opors, coopetie, or companies krespective of ther mining eprtise or financial steh. lher us at prew 200 holders of emald mining licenses each covaing a plot of on squr kiometer. Of these, only 20 can be char ized as producer and only 5 of them prodce sto with any dgr of consitncy. All but two of them are handicapped by a lack of exetso, equpmnt and access to finance. Invetmnt requirements to pmoperly exploit an mrald prospect of th sz are actaly quie substntl and rang fom $10OO0 to $300,000. But withu a proper tide to the land they occupy and becso the minn licence can, In thfeoy at least, be revoked at any time, Zambian small scalo mineas do not rerse arave investmet panera be it to local ban or foreign private inveos. 18. he gso minng sector i in a state of stgation at the psen dime. Many mal sca miers are mirs in name only, having only a minig licence, usually valid for not more than tr yar, which can be renewed but not tra nor subdivided. Some maintain a woro which may howevor be fianced by income from a sepaate busne. onseuenty U they have no incendve to move on and make way for min with more epei and better finci credendals. ssuing a mhing licence for a longer perod of tme, ay 25 year, which can be legaly etansferd or subdivided would be a first stp twards t ming the sector and allowing more qualified mnes to gradualy fiul up the isng middle. Isug of a land lease f the mining area would further strengthen the minsers position. 19. Tho laws and reguto overing smahl scale miag contain a great dea of ambiguity tat needs to be resolved in order to attract new invesment. Although the buying have ben lfted In pactice, logally they still exit. It i unclear whee thoe law alw prvate laies to opeat, but a special let of consent from the Ministry of Mines is requiredo befor thy ca buy any tough stones. ZEIL, a paratazl, Opened the fist apidary in A few small privatoe lapidaries have opened since, but there is stil too muh lega d reguat unceainty for major prvat investm to flow ntol s potntily pfit e form of eterpda In general, It b unclear what the offici posn regar foeg Investm in the sector h. The draft Mines and Mineras Ivemt Act contains prvsons lmiting foreig investmt In miig, laplsry and jewery opeatio to a minorty Inet only. For a sector tat Is stain for finance and etperis, these would be curlous prvion indeed. 20. Resolving the inadequacies the marketg ystem coud be the snglo bigget step towards frmaling the unrecord gemstone sales. At pres the mines can legaly sell their production thugh official channels (namely the former monopoly buyers), vitg buyers from overeas, the local lapidaries, at aucdon whenever one is held, or they can OOSe O personaly eport hei sones. None of thie alternadves offers the flexibility and conveniec of the Dlegal traders who therefore contdiue to captu most of th sales. Liberalizing the trade, for instne by selling trading licences to foreign a well as local buyers would graty iaem the number of buyers to whom small mines cowd sil their product lgally and thws create a compedtive buying environment and a legs altenative to the system tht is cmrety prefrred by most smal miners.

164 RMC clealy has bean an Inefectual patner In both of the ming joint venures in which i t Involved and in Is wholly owned acstvdiesuch as Mindeco Small Mines. Recoded sales at boh KAGEM and Kiba M rals are far below what they shold be, and management at KAGEM has been grossly Inadequ, although hmproving of late. Privatzing RMC's holdings In these companies combined with drastically improved oversight and audtig procedures could result in a dramatic increae in recorded sales for both operations. 22. Puivatizing RMC's holdings in both companies will be complicated, however, becase of the rights of the minority shareholders who aready hold 49 perce (for Kariba) and 45 percent (for KAGEM) of the aes. Buying their rights and pmittig an open privatization pwocess could be expensv. Unles the monopoly postons of these firms are ended, both legally and pracdcally, or rglatory oversight considerably improved, It might not be helpful to converthese fim into eftve private monopolies. 23. Fter constraints are the scarcity of geological information, the virtua absence of research, and the limited extet of professional help available to the miners. 'he exploration facility offered by MINEX (the Mines Exploration department of ZIMCO) is badly run down; the Geological department has only a seleton staff, and professional advice or training in mining teciques or gemology is virtuly non-existent. 24. In the base case scenario the suation as it cunty exists will more or less continue with two large pastal, joint venur mines lagey out of control of the government ad a large number of artsana miners most of whom are not producing. Recorded sales will continue to Increase slowly but will continue to represent less than 25 percen of actual sales. In the upper case scenario, liberization of the trading licenses will result in more compettion among buyers and hence better prices for the Zambian mins and an increase in actua sales. Recorded sales will gaduly Increase to 40 percent of actual sales as the legal tradin network catr an inas share of the totl producton. Mning licenses can be obned for a perod of 25 yeas and can be traded and subvided. As a result, there is a movement away from artsanal wards more prossiona minin g. This tend i reinforced by a lifting of all restitions an fei Invent in th sector. Prvate idnm also acouwts for a ince In lpiday activities and hence local value added. Table B3 shows the restg sales figure. It should be pointed out that -Total Revenues' do not reprent the revenues as recorded overseas but the revenues, both recorded and unrecorded, as received by the miners in Zambia

166 ZAMBIA- NON-TRADTONAL EXPORTS TOBACCO 25. For many years tobacco has been touted as the single most promising export crop for Zambia. And for good rso: climate and soil conditions are very fvorable in the rgion and, altbough demmd for tobacco products is expected to decline In the wetern world, this deci wi be more ta compensatd f by an exp Increaseshere, particulady in AsIa As a result, worlddmd for tobacco is projected to lncrease at an anmal rate of two peret through thi decade; and the market is characterised by a high level of price stability. 26. I sphoeof au thse factrs, production in Zambia has declined from 11 mllion kg at th tm of ndependence to a low as 2.5 mulion kg in Total 1991 production was close to 5.6 millon k. Muck of that decline can be taced to poor public policies. 27. At Indepdence most of the tobacco cultivation was performed by commercial, foign owned farms. The new government Intended to dcange all that and open the sector to sma Indio irme. A new insttion was created, the Tobacco Board of Zambia () to promote producdon on maul holder schemes. In addition TBZ was responsible for neotia tenders onbehalf of all growers and operaig a tobacco proceing plant None of thea geme wored saisfacoiy. TBZ's focus on small growers meant ta exsion and odr spport src to commercial farmers were neglected; growers felt strongy dtha te prices which TBZ negotted on their behalf were too low, and the procssin plts performbc deteriorated to a point where it could not produce to export specificatein. nt evionment most commercial famers reduced their tobacco production or drpped out of the sector altogether. Meanwhile, production on small holder schemes faied to take off and as a result, national tobacco production decline dramatically. 28. n 198S the overnm tried to stem the tide by creang a new ostibution, the Naional Tobac Company (NATCO) which became responsible for runing the government owned small holder shes an the marketiag and processing of all tobacco produced in Zmbia. Howeve, it was not unil NATCO privadzed the magement of some of its schemes and gave the Tobacco Associaton ot Zambia CrAZ), the association of commercial tobao farmr, responsibilityto negotiate their own tenders that production sred to hirease. Table B4 illustrates the aual production of the two main types of tobacco, Burley and 1lue cured or Vgna, for the yes 1971 to Whloe tobacco cltivation in Zambia stagnated, production in neighbourag Malawi ad Zimbbwe increased rapidly. Haing strted out from roughly the ame base as Zambia, th two counies are cu y producing at an annualevel of 100 million and 160 million kg respcively. Goverment In both counties has recognsed the importance of tobacco as an xport crop and has provided extersive research, education and extension facilites. It should be noted hat In Mawi the majority of the crop Is grown on large privately owned tenant shemes while in Zimbabwo the production is dominated by commercial hmers.

167 Ihe production level in these two countries would Indice that there a vast growth potentl for the sector In Zambia. However, some caution b called for In usg tee g owth ststics In making projecdons for Zambia as there are several gtowth constraints In Zambia thst may not necessarly exist In Malawi and Zimbabwe. 31. Ihe most hmedit constra is the lack of finance both for investmen and genetg capital. In addtion, tobacco cultivation requires experinced mana mg at severa levds. Maai and In particular Zimbabwe have good taning failites and no shortg of quaifi mages. Zambia has one tobacco tranig colege which for years has uffered fom low taching stdards and has fiiled to deliver adequately trined graduates. here has been some donor neret In exploring ways of improving the traing coege and poibly pvazing it, but no concrote steps have been taken yel I Ih absec of locaily availablexpetise famers may find it neceary to obtain thi expedts from abroad. However, unti recenty, Zambian growers have found k difficulto import tobacco exetso. I at least o instce, a tobacco scheme closed down for failure to obtain work permi for expatra farm managers. 32. The culivaion of tobacco, particularly flue cured tobacco, i labor i s requiring a large, w e trained and disciplined labor force. Malawi has a long tradition of larg scale tenant farming with a high level of disciplin. It remains to be seen whther the Zmbian agriculturalabor forco would take to that form of wort Commercially managed ougower hemes req sufficiet concentrations f small famers. At presnt Zambia only the easten and southern provinces have these co ions. In other parts of th country whoer tee are lre tracts of unutiized and suitable land there are not enough farmers to work them 33. An absen of tobacco related research, inadequatexnsion and Ineffident farming ysems have reulted In averge yields in Zambia which at less tha 900 Kg per Ha aro fr below those obtned in Malawi (2000 kgha) and Zimbabwe (more than 2,Sl Kg/H)a). Zimbabwe has a highly developed tobacco research stion whose findings are fed Ilo an effecive extension force. In Zambia no tobacco research has been performed sice Tobacco culdvaion, and pacarly flue cured tobacco, is capital intevo and requires expensive inps. It would require an estmated $1 million to eshblish a commerca farm of 50 Ha. growing flue cured Vigna tobacco with a production potential of up to 100,000 kg. A simiar surface wea growing burley tbacco would need an invesvmut of aproxmately $140,000 and wuld produce up to 42,000 kg. 35. Althog land t in abundance In Zambia, reguations cerang the trsfr and holding of Ilnd ar complex and contradictory. In effect, farm wiu find It difficult to open up new far In areas with sufficient population density to find the reqired mber of labou. In sme part of the coumtry largets of land have arady been Mt aside fot agricultal pumposespecficaly along the TAZARA rairoad, but as has been noted befor, fam labor would have to be imported from elsewhere since there are not enough labourer available locally for tobacco cultivadon Recenty there has been a noticeable inree In the number of Zimbabwean tobacco farmers that have come to Zambia to look for opportunities. They had to be advised datihe best way to get started relatively qully wotd be to buy a

168 extg fam. Wit the privtzat of farms owned by the ae or by parat compaies, a number of once wel maaged tobacco farms should be coming onto the market. 36. Finally, the vaious nstittns involved In the obaco seor hav been fncioning In a m er not conducive to instilsg Invsor' confidence. ROcently so Improve hawe been made. TAZ has ained the righto negotate Its own tnders for I members and ba also been contracted to rn the sales floor In Lusaka. And NATCO Is conuing to privatize the nmaagem of Its small bolder scheme as a preude to Its outright privatization. NoneNdasl there Is stdi plenty of cfuion as to which oranizaton has and wil bave rpniblity for what. A clearly deined regulatory and instutoal eonvroment wt littlo or no governent Involvement particularly In the area of crop pricing, processi and maketing wfll be rwed to act substandal investment to the sector. 37. People famfliar with the sector seem to agree a 8urey tobacoo has the higest grhpotel. It rewor less caphl tment dtha flue cured tobacco and therefre is eminenty suitable for small outgrower schemes. Table B4 illuses the point. ho recent ps Burley tobacco produton Is mostly accounted for by smallholder schemes who previousy were managad by NATCO but have come under privat and more effident management. The market prosec for is tpe of tobacco aro good as it increasingly preferd by the consumes. On the downside, ths crop s very bor intensive, but to th frer who Is wmig to tadke tha ptoblem k offers an earnngs potential iat can be a multiple of many of the more udtion crops. 38. Commercial famers account for most of the flue cured tobacco production and wm conude to do so. Mch hope s puined on an Ilax of expeienced commercial farm fiom Zimbabwe and posibly from South Afiica However, as bog as these couties rest the amount of capit hat thir ihabita can tak out, i can be quesdoned to what extd Z abwn farmers wil ave the financi strength to mount commeal faming opeato In Zambia 39. For the purpose of tis memorandum two growth scenarios were deveoped. In to fist, base case growth will be rstcted by a mber of factors: after an ini upuge in th number of small holder schemes the incree will taper off because of a lack of farmer and farm labor, cotin shortcomings the land legislaion and other aset of the fnvr_n cl will litthe rowth in number of commeci farms; bcase of a lack of reearch and ea ion support the average yields obaned by small as wel as commerial farmers Dwl ias only slwy from their curre levels. Table B6 so the resuldtig grwth projections. It is asumed that local conumpdon contnues to be by a sole ciaette whose production wil hrea at the same rate as the population. Al reaiig production will b expord. 40. Table BS dsows a high ca scmnio In which a mbte of conditions have been flfilled A completely ovehauled land leglaion and streamlined allocation procedures wil faiitae the entry of a ulmber of new small and commercial fams. Mangmen exets wm increasily be fountd cally amidst he graduates of a reorganised nd vstly iproved tobao colleg. To the e d tt expertis nes to be ob d from abroad ths procs wl be ported by a li work pemit polcy. e anvilbty of frebold tidtle to lnd or an etension of the use of long term leases wui assist farmers to

169 obtain hither wnaccible long term bank financing and an Imprved Investmt clime will attract a steady invesen sam from abroad into the sector. A newly established and pdvatly na extension servie together with a esearc prorm eittier executed locany or in connction with the faidities avable in Zimbabwe will result In stadily Improving yields for small and com cal faimers alike. As for local consumption, a similar aswumption has been made as in the t cas.

173 .160- ZAMBIA - NON-TRADMONAL EXPORTS COTTON (LINT AND YARN) 41. As with such crops as tobacco ad coffee, govennt bhas concenrate its efot on promodti coon as a crop for small scale growers. To this end a parastata organization was cated, the Lint Compay of Zambia (LTCO) which was to provide small famers wh pus, crdit and extio services ad collect and purchase the crop at a guarated price. Today, more than 90 pere of Zambis cotton b produced by small growers, unlike tobacoo and coffee, where In spite of all the goverment efforts only a minor portion of the total crop is produced by small cultivators. 42. Nevertheless, governmn's strategy in promoting cotton cultivation camot be called an unquaied success becae Zambia's cotton production has remained far below potential. The pices offserd by LINTCO were oftet unattracve compared to alternative crops such as maie and soyaben and have limited the number of famers that switched to cotton. The mai reasons bave been LJNTCO0s excessive overheads and iheir atempt to collect seed cotton f&om all areas of the country even when distnces made it uneconomica. In additon, LITCO's record on prving extension services and adequate inputs has been erratic and as a result small gwers have been unable to steadily Improve their yields. Table B7 shows the crop statcs for the last five years; the wide swings in production are partially explained by dlimati coitions but also by the failure of LINTCO to timely provide inputs particularly pcides. 43. Wodd wide demand for cotton has been strong for sevend years and both demand growth and relatvely stable prices are expected to contiue. World production is currenty at 92 milion bales and Zambia wih an annual productio not exceeding.04 million bales is only a vry umall player. Ther is a substantial and as of yet largely unused potental fbr value added in the fm of cotton yarn and textiles and becase of the reltvely small quntities ivolved Zambia can safey expand its exports without fear of running io any impt restrictios In developed countries. 44. Apart from two commercial farms and one large outgrowerscheme rn by LONRHO, all other growers we dependent on LINTCO for the sale and marketing of their crop. The tuere development of the secor will therefore to a large extend depend on how effective LINTCO will become. Ithe company is a candidate for privatization and its efficin is theefore likely to improve. However, if the company is to be run along sound business prnciples some radjustmet in the sector will be inevitable and many of the more marginal gowers In outing area may have to be eased out of cotton production. 45. Cotton production is highly sensitive to outside factors. Slight climati changes can sevely affet yields. The crop is very susceptible to a variety of pest and diseases and ires a stictly managed spraying progrm Seed cotton is bulky to transport and distances to the processing plant should be kept to a minium. All of this would argue againsthe viabilty of cultvaon by dispersed independent smal growers.

174 Te a at prest si ginere opeatng In the couny, fo of which ae whly owed by LITO, one Is pominy privae (OVDC) with only a small L1NTCO dsare, and one i a joint vn between LlNTCO and LONRHO. The four IINTCO Sgnerles sff from seve management shortomngs and although sated capacity shoud be adequa for now, productio bottlenek frequently occu partculaly In the ean provce and th Lsak room Th gieles ae incapable of classifying the cotton lint along internional sandards which afet the International marketablity of Zambias product, although Improved management and ptoceing procedures could remedy this. Private inestmen would quicldy solve many of thes problems. A satisfitory solution to the Issue of LWNTCs's pdvatizatlon would spe up the inflow of prvat Invement into the sectr. 47. Both existig commrcial farm use irigado, are higly mechanied and achieve yields of 3 to S mtrha co ared to the 500 to 700 lg/ha prduced by small growers. Hower, tbe complextis of h curent land legisation and Its administrtion ae a severe consrainot to the raid expanson of commrcia faming of cotn or ay other crop for dta matter. Therefo, a firte dewopment of commercily n outgrower schem involving exstg small fmrs shows the highest poteni for expansion in the short term. 48. In deeloping export projecos for cotton, both the produedto of cotton lint and cotton yarn were takn Io account Unti recedy there were three spi mills in the cntry, two of which ar staot owned and supply the loca state owned texte induy. Ihe private mill was able in a reativdy short period of dme to build up an export business accounting for more thn 60 percen of its revenues. Spurred by this success t mor privat ms have baen opened in e last two years, and farther expansion is planned. 49. Othr developments that will affect the sector's perfomance are LONRHO's plans for a larg ougower scheme possibly involving up to 10,000 farmers and a planned EEC funded ic assistance project at would aim to improve crop quality, efficiency of production and poti for vaue added through manfare of cotton based products. 50. In the base case scenado Cable B7), it is assumed that conditions as they cuntly exist will m or les perit with a slow expansion of production by outgrowers, continuing I - - in upport sevices and prcsi facilities and only limited ret by commeci fmrs due to the comlexity of acquiring land. In the upper cas scenaio IFablOB9), it n assumed the land issues wll be rolved, resulting in a rapid incese in eraly un outgrower suhm and a steady increase in comrcial frming. Supported by efficie privat management, small outgowenr achieve steadily Improving yields. Priat invstment wil Improve and expand processing capacity. Sl. For the purp8o of calcat export revenues it is assumed that al seed cotton i process Io lint at a con ion ratio of 40 percen; part of the lint producdon exporwd and the rainder mid to the domestic mills all at a price of $1.01 per KG in const 1992 USS; the mill pocess the lint into yarn at an avage conversion tio of 90 percet and export a grwing pordoa of thdr production at a price of $2.45 per KG in constant 1992 USS.

177 ZAMBUI - NON-TRADMONAL EXPORlS CEM-N 52. Cumrny, Ihere s one cement company In Zambia, a parast which operates two plants. One of the two plas uses an energy nefcient manuacturing process, s aproximately 40 years old and will need rehabilitation within the coming decade. Ihe other pln i quite new and opt satisfactoriy. 53. The company produces both for the domestic market and for expots although high coss lm the distes over which k cn export. Pre ly, domestic demand for cemt d ed duo to the low level of onstuction cavity. In 1991, the company shpped 360,000 mt to domsic clients; the remainder of Its 440,000 mt production was exported, r4tly to Zalre, Brundi, Zimbabwe and Malawi. 54. The company is competitie In quality and in price in its export markes but so far has not been very aggrssive in promodng Its product abroad. It is being considered as a candidate for pvtat and becuse of its potential will likely be met with considerable interest from prvate Investors once it is actually put up for sale. 55. In the bs case scenario, domestic demand remains at the acrrent depressed levels. Due to capciy constraint cused by kg aging plant, the compny is unable to expand its expor. In the upper casm scaio, the privadon plans for the compny are implementd. Now Inv_estm from the privat ownr stops the decline in the plant an gradualy adds to te capacity. Mhe domestic market recovers grduly and the added capaciy alows the new owner to aggressively pursue export opporunities. Tables B9 and B10 show the projected export revemnes in these two scenarios. In both cases a fcory price of $45/mt is assumed.

179 -166- ZAMBIA - NON-TRADITIONAL EPORUS ENGINEING PRODUCIS 56. Ther ar fom plant In Zambia proucin coppe and coppe alloy products. Two compaes produce such copper baed product as power cables, mwet wires, telepon cables nd copper rods. The other two produce copper alloy products including bronze rods and ngs, bms rods ad ingots, and copper alloy shee. Curren production stands at 50,000 mt of copper-bad and 1,000 mt of copper alloy products. Apprximatdy 85 peren of totlproducon s exported. Total exports of thee products reached a value of $27.7 Umin In CqpcIty utilization rates for theso plants avage 65 percent. For copper products, the mrket s the lminwg factr, for alloys, espeially ose made from recyled metal scrap, w maea supply s th bottleneck 'e plants enjoy a competitive advantage due to Zambs cheap power spply. 58. Fut epou w depend primarily on the extend to which new nvetm wil be made In the sector. Ihere are currently plans for expnasion of one of the existing cable pla, and a new alloy sheet rolling mill. Depending on the outcome of these Investmt plans poducion and henc exports could increase by 30 pecenet over a five-year period In the ba cm scaio, and 160 percen in the upper cas cenario. Table BlI shows the projected export revnu for each scenrio. Table Bll Zambi Engineering Products, Projected Export Reves ExportR_eens Be Cas llionss) ExportRevenue Upper CaSe (Mlio S) - ~~~~~.-i---i."_ m

180 ZAMBIA - NON-TRADmONAL EXPORTS COFFEE 59. Coffee is a relatively young crop In Zambia havig boee introduced to the country within the last ten years. Initially, the government attempted to promote coffee as a crop for small growers. Ile Lint Company of Zambia (UNTCO) which had originally been set up to promote the cultivation of cotton among small growers, was given the authority to organize coffee culdvation by small farmers as well by providing them with credit, inputs and etension services and procurig the crop at a predetermined price. The attempt failed however, largely because the price that LINTCO offered to the famers never was sufficienty attractive to justify the effort. 60. It was not until the 1989/90 growing season when several lar commercial coffee schemes came on stream, that national production sar to increase significanty. Table B12 shows coffee export data for the last five yeas. Today there are an estimated 2000 small gowers and 16 commercil farmers and the latter account for 98 percent of total production. Practically a production Is exported. 61. Total world produidon of coffee currendy stands at approximaly 70 million bags and Zambia with a production of 26,000 bags is only a miniscule player compared to for Instance Brazil wich produces up to 20 million bags annualy. Although demand for coffee is steady Increasing, world market prices for the commodity have been depressed since the collapse of the intational pricing agreement in Zambia however, has not been affected as severely as some other counries, perhaps because of its small production and the fa that it produces a high quality coffee for which there Is a ready market in Europe. In fa, Zambian growers were able to get better prncl in 1991 than in the previous year during a perod when world prices continued to decline. Although it Is generaly expected that prices wil decline further, industry observers agree that it is just a matter of time before the major producers will come to a new pricing agreement. 62. Recent developments In Zambia have signiffcandy Improved the outlook for the sector. Ihe Coffee Act of 1989 has reduced the role of government in organizing coffee production and given some of that authority to the private sector instead. The Zambia Coffee Growers Asociation (ZCGA) which represents small as well as commercial farmers has been charged with overeeln the producdon and export of the crop. LINTCO has withdrawn from the sector and although some small firmers have been hurt by this development, the majority is expected to benefit from the new arange. The Act also stipulates that only high quitq arabica coffee can be grown in Zambia and thus strives to reiforce Zambiaes image as a high quality producer. Ihe state owned Zambia Coffee Company Limited (ZCCL) which had been the sole entity for processing coffee in the country has lost this monopoly position and Is now a candidate for privatization. 63. A US$32 million Wodd Bank project is epected to accelerte the growth of coffee production in Zambia. Through a credit facility and a combination of support for extension, marketing and research, the project intends to multiply the area under cultivation and more than quadruple natonal production within seven years. The project was conceived in a pcriod

181 whon govormens focus was exclusivdy on small growe cultivaidon and hence was hnded to pr i benet smll growers. It is currently bein redesigned to ackowledge the hpotat role that he, prvate swctor and In pariculat commercial farme ae playing In the devopment of the sector. 64. Coffee I not an eay cop to grow. I takes at least three yea for the tre to st prodcig; It I scpble to disease, particarly the dreaded Coffee Ber Dises, and I requir considerable labor and capital per hecte of land. Therefore, it can be agued that i c s less suitable for small scae famers and more appropriate for large scale commecial faming. But for commerci famers to enter the sector in a significant way In Zambia, some measure of int inal price stability will have to be reestablished. 65. Because te COpaisp lvely new to Zamb, theie still a ack of indgenous expte. For production to increase, foreign expertse wil remain idisesable for sore time to come. A Lberal labor pert policy wil be reqhed to sustain the stors growth. 66. Much of dte deveopment of the sector will depend on the effecdtveness of the Coffee Grwe Assocaio Beig funded out of a levy on exports, the associat's fiacal ba will remai weat as lowg as exports remain small. And having been given what amounts to monopoly powem., It b esential that the asociation wil rmain responsive to the needs of it8 67. Two scenaios wro deveoped both projecdng significant growth In coffee producin In th bas cae sconaio (rable B13), small groweas contdiue to phy onlv a minor role in coffee production In hite of the supporthey aroe recing frm the Wc;.Bank project. hme world market cies to suffer from depessed prices which in tum limits he itst of commedi fainum the crop. 68. In the upper case scenario Crable B14), it i aumed tat a new Intnaonal agreemn is reached on coffe paces which will put an end to the pdce instabuity on the wodd maket. Tbis tether wit contnuing strong demand wil attract a growing number of commecl growers to the sector. Small growers are able to improve their yields from the curre negligible leves up to 850 Oha spured by atrtive pdces and supported by extnsion sevces fom an increasingly efective ZCGA. In both scenarios, all production b fr expot, and export vn mes ar epssed In constant 1992 USS's.

183 -170- ZAMBIA NON-TRADmONAL EWORTS MAIZE 69. Malze i by far the most import crop In Zambia accounti fbr app mately 70 peren of itl agutuwl crops produced and hecwage cultivated. Achieg sedf sffiecy in mai I one of the most mortn nadona goals and although In some good years Zambia has producd ough to cover nationad consumption, maize self sufficiency is by no mes amred. 70. Becas of the Impotn of maize as the staple diet of most of the Zamblan population, govenme has felt It necessary to involve itself heavily In the suppot, regulaon and supervision of th crop production. Traditionally, the cost of input were subsidized, via pdre of the oupu contolled, the price of transport fixed nationwide, andthe export forbidden. It has becom hcrasiny elear that these measures do not secure self suffiiency and are an unbearable burden on the govement budget. 71. Table B15 shows maize production for the five-year ped together with ar panted and average yids achieved. lhe eatic yidd pae I to some degeo due to lr rain fls, tut ate val of inputs, poor stouge and tranport fctios, lack of credit d late paymnt for the prodct have all conributed to the genealy low yidds. Yields of up to S mt per ba are considered feasible partiarly on more efficiey rvn lag fam, but Zambis avage over these five yeas has been less ta 2 mt per ha 72. Although no maize expors are officially recorded, it is generaly assumed dt a substanl pordon of the atonal producdon gets smuggled to surrunding counti spcificly Malawi, Moambique and the Shaba Province of Zae. For in c, officia csw for 1990 sbow the averae per capita annual connupton of mae In de copper belt to be 257 kg compared to an average consumpton of S0 to 70 kg I most other part of the country. AA In the East prvin 1990 sades of 222,000 mt far exceed the eimted local consum cf 34,000 mnt. In boti instances it can be inferred that a substanta portio of t. surphls aull Is xqored. And as long as maize prices are kept artifically low in Zambia, these expors wfll rmain unrecorded. 73. However, a gene trend towards deontrol and deregulation of the mizo sector whih started a few years ago has beean reinfced by the adven of the new gov er As the price of maize I allowed to approximate mare levels It ca be expected thatprdut wll increase. But as prices for inputs and more lmportantdy, tranportution are decontrolled, some arems of h country such a the oastem and northern provnc wi becom less competitve in spplying th majo domesticonumption centr. If however, the ban an exports Is lifted at the same dtm, these areas ao well positoned to become compettive mai eporters. It Is generally expcted that the supply and production of maize In Malawl, Mozambique, Angola and Zaire will temain constained.

184 Clealuy the biggest obsace to maiz expots b the gov e's regaon forbidding il But even In the absec of an eport ban, maize exports wil be handicapped by te low value of the crop rdtive to the bhg os of transporting h. Commercial frmers with tir hhr yields and grea ficl strengt are bettr posioned to take advatag of export oppotunis for malze. But a comercal hfmer s likely to eauat the profitablity of maie In ligta of the highr enings potial per hectare or per ton of such crp as coffee and tobacco. 75. Othr obstales to market maiz abroad -a Indeed they are to matredng the crop domestcally- arthe inadequat storage, procsing and dbu ntio sysms. Until recty all of these wero controlled by goverment. Private invtment s indpenble to solve ths bottlencks, but a stable policy environment favoring private invesment needs to be esablied before significant amount of private capital will flow Into the sector. 76. In gneal, maize as an poa crop may be handicapped as long as domestic production s not wel above domestic needs bocause it is considered to be a strategicrop for IhIch national self suf cy s the fir prirt. 77. In a ba case scenaio the curet gov uent policy forbidding maize epots will remain In place conseently no official expots are recorded. In an upper cs sceario this ban is lifted and prvate aders ar allowed to export maize. Other policy mm taken to facit e nty of prat cpital Into the sector. Through a combinat of incased hectag and Improved yields, production i aes above the level of self sufficiency. The p establishes a strategic reserve program dtrough vwhich it manage to stabiuze suppis and pries on te do_meic mark. For the purpose of calculating export renes it is amed tha the border re for a 90kg bag of mai is US$16 in constant 1992 donars. Table B16 iustae what the potntl export reveus from maize could be in tis scenaio.

186 ZAMBIA - NON-TRADinONAL EXPORTS POWER 78. Zambi has a toa of 160 megats (MW) of hydro-electric power generating apaciy at thre power staton on the Zambezi and Kafue rivers, KarTba North (600MW), Kafe Gorg (900MW) ad Victoda Falls (108MW). Kariba North uses watr sed In the gia Lak Karba, water t shared eally wih Zimbabwe. Kafue Gorgo and Victoria Falls ae rn-of-h-rver stations witout significan war ore fcides. In combitonl, dth three aton are capable of generatg about 9,000 gigwa hours (GWh) of elecwt per yar, on avag. Kariba North and Kafue Gorgeo are cuendy In good operatg condton, but Victra Fals is over 50 years old and cannot opt a full capacty. Zmbias power system I co ted at high voltago to the systm of neighboring Zimbabwe and Zaire. 79. Dur the 1980s, Zambias electricity demand aveaged 6,000-6,500 GWh per yea, about twothirds, of the avaiale supply. Until 1986, most of the avaiable srplus was exporedto ZIbabwe, eing Zambia US$20-30 million per yea. Zaire also had a considable sutplus of power, so was not a poteni market for Zambia. Sic 1987, Zambi power epor to Zimbabwe have fallen sharply, due iniily to the commi of nw generating pl in Zimbabwo, then in 1990/91 to a major fire at Zambias K}afo Gorg Power Staton tht badly dmaged the facilky, and in 1992 to the sever drught In th region ihat has reduced the flow of both the Zambed and Kafue rives and hence Zambia's spply of hydro power to lessim 5,000 GWh. Mhe Cunm PDWE alion and 1_edate E fog n 80. Ihe seity of the drout i such ta, for tie fist tim since the Kariba Dan and hydroelectric facty wa constructed In the 1960s, Zambia was unable to fully satsfy domesic power demand in 1992 even with the Import of 140MW from Zaire. Mm fire damage at the Kafe Gorge Power Stadon i now fuly repaired and, should the 1992/9 rain be ava or above avage, geneadon will begin to increas at tis ron-of-dt-river staon by mid-1993 to an t hat will probably displace Zairlan imports but not pwvide an export uplu. On this optmitc scenaio, Zambia wili herbte be a modest not importer of power in If the rais a again poor, imports from Zaire wil conue at the rate of 1O0MW at a cost of US$5-10 million. I _E~TEomfr am z= 81. At to end of 1992, he level of Lake Kariba was only just above the water Itakes for tho power genaor at Zambis Karba North Power Stadon. Even with good rains, it wil take at lea two to th yeas for the W to fill to a level that wil permit uflfciet genaio at Kariba for Zambia to have a significst qutity of power available for expor. With the exist transmission system lins, the only potenti expot market for its power surplus Is Zbambwe. Whilo Zimbabwe is, like Zambia, cutrently short of power, plas are well advacd to itec c th Zimbabwe power system with both the Cabora Bassa Power

188 Conaratve Notes on the Old and Resed Ntaffional Amu Agmtes 1. The Centra Statical Office has been producing national account aggegat (ie. GDP and its components) and other economic and social statisticsince the mid-1960s. The GDP estiates have suffered from several weaknesses. First, the coverage of economic tvities Is often parti. The Gross Value Added (GVA) in many sectors covers activities red only by th form sector, although employment data based on several sreys show txt existence of a large number of people engaged in the informal sector. The ntributi of these activities to GDP (eg. forestry, rental income, etc.) has been largely left out. Second, In many cases, OVA is based on a fixed Input-output ratio which has been held constmt since the early 1980s. Third, only imported machinery and equipment are considered In the derivation of Gross Fixed Capital Formation, although domestically produced captl goods and construction activities form an importan component of investmen actities. Fourdi, there have been valuation problems. Proper account of all indirectaxes and subsidies was not made in deriving GD)P at factor cost from GDP at market price. Fifth, imported capital goods were valued at c.i.f., disregarding internal transport and handling costs and addiional taxces that may exist. To resolve some of these shortcomings, the Ministry of Finance (MOP) employed a consultant during October and November 1992 to assess the methodology of nationl income accounti used at CSO and to recommend improvements. The consultant produced aenative estimates of GDP at factor (producer) cost and market price, and at current and consnt prices. Ihe main focus of the consultant's work was the production approach, but he al provided estates for the other usual macroeconomic expenditure categorie such as nvestm and consumption at current market prices. Tbe Revised Series, as it is generally calied, provides adequate documentation for the production account, but the necessary doumentation Is not complete for the expenditure approach. Forunately, the methodology for thr of the expenditu categories, private consumption expenditure, Gross Fixed Capital Pormation, and aggregate GDP, can be inferred from the data and other information provided elsewhere in the docment left by the consultant. 3. The accompanying table provides comparative rates of growth of total GDP and major productive sectors for The table also provides the shares of the major productive sectos and the various expenditure categories in GDP for selected years in the 1970s and 1980s. The lower half of the table compares the growth rates and shares from the Revised Seris those Implied in the Old Series. The comparative figures indicate whether the growth rat and shares based on the Revised Series are higher, lower, or about equal with th corespon figures in the Old Series. Note that in the case of growth rates, when dw rates In the Revised and Old Series are negative, higher implies the decline Implied in the Revised Seris was less shap tan in the Old Series. 4. Annl Growth Ratesof G ad Q_rWXW:.UM Based on the R%vsed data, the growdh rate in total GDP was higher during and and lower during the

189 Itrning periods. The growth for the entire period, tanding at 1.1%, was hower about equal in boti Series. Me growth rat for the entire period In the Revised Series oveas the period between 1970 and 1991, while the Old Seres covers ) Setraly, agultue rorde a hhr growth rt, while the fal in ming was less swp In the Rvised Sers. On t other dde, m output showed a lower grow i ith Revis edes (2.4%6 compred to 4.4% In the Old Seria), whilo the decin In constuction was somewhat dwer In the Revised Sere. The comparatively btter pedomce in agricut and mi-n wa xreby offset by the pooror p mance In manufaing d conucdon to leave the overal grwth of ra GDP unchanged. S. S e:w mqwm.- Compared to the Old Series, the share of agriculture and Ws in total GDP has beean consitenty lower In the Revised Series. On the other dde, mining, construction (ecept 1975) and services (mostly after mid-1980s) have recorded hihr se in the Rved Series. This i, of course, a eult of the diffenc In the tred In GDP deflator betwn the Revised and Old Series. 6. 1= ltue : Ihe expenditue side wa a last minmte addition to the consultats tas. As a rest, It lacked the necessary do, and some expenditre aerw to be h with the actual experience during some years (e.g., expors and in 1989). Furdtamore, no efot was made to derive detators or the real m areconoic. To resolve some of these problems, the deflators in the Old Series were used Just by Cdhgi the base year from 1977 to 198S. Curet and constant pre expenditure data based on the Revsed Series are provided in the tables below. 7. Looking at the shres of invesm and umpion ende in Wg pgt GDP at curt prices, a few Impotan points emerge. First, te dare of investment, partdculaly the dse in 1990, ppeas to be very hih and much higher than the ares based on the Old Series. Secondly, the share of consmption expend eems to be undesated in the Reilsed Series. Third, the tend in the share of conumpton does not seem to be conitet with theft standard of ling and Increaing poverty In Zambia. It is often the case a te share of consumption In income (GDP In this case) tends to rise as ani economy is Impoveished. But, the shae of consumption expenditure based on the Revied Series does not seem to be compatible with this overall understandin. Fourth, the share of Impors has been about equal or lower In the Revised Series while the share of exports has been lower fw most of the years except Thus, the lower daes In consumption expenditue, expors and Imports are comesd by the higher share In nvbestmnt since investment has beneftw from the inclusion of domestically prodced capita goods and changes In valuaton in th Revised Series.

200 187 - DNM Consmpdon Pffetns and Prbe bdl6es 1. The ltionary envionment and the substantial reladve price changes among cmmodity groups cmsdoubt on the use of the Zamblan prce ndex, the base of which goes back to Ih Laspes Index, used for measudng changes In tie comumer price index, usually oversttes iceses In cot of living, a substiuon to e goods with relively lower price Increases i8 mt taken nto account by tis measu. Between 1975 and 1985, the share of the poor's Income devoted to food, beverages and tobacco fel from 60 to 54 percent, whereas the share for the rich increased from 36 to 45 perce (Table 5.5). By 1991, however, with many price controls and subsidies abolished, the rural popuadon spent over three quar of their income on fbod, whereas the urban population spent over 63 percent on food. 2. The aggregate figures disguise strong differences among expenditure decies. In 1991 the lowest decile spent 89 percent on food (Table 5.6), beverages and tobacco, compared to 77 percent in / The highest decile spent 56 percent on that category, a marked increase from the 34.6 percet for highest income bracket in 1976, suggesting that every income group suffered from the economic decline. 3. Within the expenditu group of food, beverages and tobacco, several shifts can be observed, but considering the long fts period e -ice the base for the CPI was established, the shifts are relatively minor. In urban areas, the baare of cereals went up from 7.3 percent in 1974/75 to 9.7 in 1991; the share of fesh vegetables from 4.6 to 11.2 percent, and the share of meat and meat products from 9.4 to 13.7 percent of total expendiures. The share of clothing and footwear went down from 12.0 to 7.8 percet. In rual areas, the expenditre share of ceeals went up from 19.0 pecent in to 22.7 in 1991; the share of fresh meat fell from 13.1 to 9.0 percent over te sam period. 4. ExpendIture Elastcties. Tbe only inferior goods in the consumption basket of the urban Zambian in 1991 were maize meal and cassava (Table D.1). VI Neither of the two had, however, a negative income eldasticity in nral areas. Meat was considered a luxury good in rural areas, but a normal one in urban areas, whereas rice was a luxmy good in both areas. The information on the elasticities is in appent conflict with the shift in shares of various goods. For istce, one would not expect a luxury good like meat to incrse in expendiure share in times of falling incomes and overall expenditures. One reason for the observation could be that substitution to relatively less expensive goods Is hmpered by availability of such goods (Table D.2). Especially in rural areas, availability Is low, and the impact of nonavailability is higher, because there usuly are no alternative shops naby, contrary to urban 1,/ Household Budget Sunrey 1975, p Mm o eastiities am derived fiom ro section dat, and do tes inerior ad lwny goods shuld therfor be intrprwed with amw.

206 ,... TABLE 4: ZAMBtA NUMBER OF EMPLOYEES IN THE FORMLA SECTOR 1/ (OOOs) :9c' Agriculture, Forestry & Fishing ' Zaian s Mon-Zambian Ifning & Quarrying S S Zambimn ? S Non-Zambian Manufacturing zarien S Non-Zambian Construction famblan Ron-Zuti1an Transport and Comaunications S Zabian c S Non-Zambian services 2/ Iaibian S Mon-zambian ' Atl Sactors 2/ n2.? zacbian Ron-Zwbian o / th Quarter Figures. 21 Excludes domestic servants; includes electricity, hotels, and oth-^ services. water and sanitary services, financial and busiress services 4 restaurants end NOTE: In 1972,the basis of classificeation changed from ethnic group I.e., "African# and Unan-Africanb to citizenship, i.e., "Za bian" and "non-zasblen". This should be kept in mind when looking at the disaggregation by group within each sector. (The 1969 poplation census Indicates 96.3 percent of Africans held Zacbian citizenship, white 20.1 percent of ran-africws held Zamrbian citizership; of total population percent were Zantian white 98.8 percent were African.) These revised estimates from 1980 onwards are based on the 1992 Employment and Earnings survey. This survey Indicates that formal sector etployment may have been underestimated for several years. Figures have been revised back to 1990, using the results of the Census of Industrial Productfon, camercial Farmers Survey and the former Employment Inquiry. These figures should be regarded as provisional untit investigations have been made. These figures exclude domestic workers and uipaid family workers. SOURCE: Monthly Digest of Statistics and data supplied by C.S.O.

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